Pitfalls in Commercial Leasing for Landlords and Tenants

PITFALLS IN COMMERCIAL LEASING FOR LANDLORDS AND TENANTS

By Joe Scurria

Director, Avon Legal

Introduction

Leasing is an attractive option for many business owners who need flexibility in location, size and nature of premises.

This article identifies some important legal and practical issues that need to be considered by landlords and tenants.

This is a general guide, you should obtain legal and financial advice dealing with your specific circumstances.

Regulated Leases

If the premises are used wholly or predominantly for the sale of goods by retail, the lease is likely to be regulated under the Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA) (‘Retail Shops Act’).

A lease is also likely to be regulated if the premises are in a retail shopping centre (even though the premises themselves are not used for a retail purpose); or if the tenant is operating a specified business as defined under the Regulations.

If the floor area of the premises exceeds 1,000m² or the tenant is a public company, then generally the Retail Shops Act will not apply.

For example, large retailers like Woolworths and Coles will not be protected by the Retail Shops Act because Parliament considered them to have sufficient bargaining power to look after their own commercial interests.

Landlords of Retail Premises generally need to provide:

a) a Disclosure Statement – setting out the important commercial and legal terms of the lease, and incorporating a draft lease; and

b) a Tenant Guide – which needs to be incorporated into the lease.

Tenants under regulated leases are entitled to a minimum right of occupancy of 5 years, unless special approvals are obtained.

There are limits on some of the costs and expenses that can be recovered by landlords from tenants under regulated leases. Costs which cannot be recovered include legal fees of preparing a lease and documenting an extension, managing agents fees and one half of the costs of auditing the outgoings. This however is not an exhaustive list.

Unregulated Leases

These are generally office premises and industrial uses which do not have a predominant retail activity.

Legal costs associated with the preparation of and extension of leases, and managing agents fees, can be recovered by landlords from tenants.

There is greater scope for landlords to recover costs of operating and maintaining and sometimes even improving the premises.

Although not regulated by the Retail Shops Act these leases are governed by the common law and the relevant provisions of the Transfer of Land Act 1893 (WA) and Property Law Act 1969 (WA), and where applicable other legislation relating to the subject matter of the lease.

General Considerations

Length of Term

The length of term is an important consideration for both parties.  Generally landlords, prefer a longer term securing property income – however this can limit possible future redevelopment and sale opportunities.

Option to Renew

This is generally a term of the lease which benefits tenants, as it is exercisable solely on the tenant’s accord.

Registration of Caveats

Tenants should consider registering a caveat against the title to the premises, to ensure that any option of renewal is fully protected.

Redevelopment Clauses

These are generally to a landlord’s benefit, and enable a landlord to terminate the lease if they wish to redevelop the building.

Unregulated leases generally have no provisions for compensation unless specifically negotiated.

Redevelopment clauses in regulated leases will only be valid if they are included in the prescribed form or if they have been approved by the State Administrative Tribunal.  These will not be approved unless there is adequate protection and compensation for tenants.

Damage/Destruction Clauses

These provisions allow either or both parties to terminate the lease if the premises are destroyed through fire, earthquake or other unforseen event, and if it is not commercial for the landlord to rebuild, or for the tenant to wait for the landlord to rebuild the premises.

These are rarely relied upon, nevertheless parties should carefully consider damage/destruction clauses when entering into a lease.

Rent Review

Rent reviews are most often conducted every 12 months during the term of a lease.

Under regulated leases, there can only be a single basis for rent review.

This does not however prevent the method of rent review alternating from one year to the next.

By single basis it means that it needs to either be CPI (sometimes with a margin), market or a fixed percentage increase.

On a market review under a regulated lease, the rent can go down if market conditions fall.

Unregulated leases generally have a ratchet clause which means that the rent cannot at any stage go down, even if market conditions or CPI fall.

Air Conditioning

Air conditioning repair and replacement needs to be carefully considered.

If air conditioning is supplied by the landlord as part of the building, generally the tenants will be required to maintain and service the air conditioning, with the landlord to conduct capital repairs or replacement.

This is something that is negotiated on a case by case basis.

Conclusion

Whether you are a landlord or a tenant, by carefully considering the above factors, you will ensure that your legal and commercial interests are protected.

It is important to obtain legal and financial advice on your specific circumstances, to ensure that the rents that you pay or ask for are commercial and reasonable in the market place.

If you have doubts or reservations about the building or rental, don’t hesitate to get a builders or engineers report, or to ask a licensed valuer to give you a market rent valuation.

These considerations are particularly important for medium and long term leases.

Disclaimer

This paper cannot be regarded as legal advice.

Although all care has been taken in preparing this paper, readers must not alter their position or refrain from doing so in reliance on these papers. Where necessary, advice must be sought from competent legal practitioners.

Avon Legal does not accept or undertake any duty of care relating to any part of the papers including its contents, index, tables, legislation or case index (if any).

Copyright

This paper is copyright.  Apart from any fair dealing for the purpose of private study, research, criticism or review (as permitted under the Copyright Act) no part may be reproduced by any process without written permission.  Inquiries should be addressed to the publishers.