Tips and Traps for Retail and Commercial Leases
Retail and commercial leases form part of many business transactions and commercial property is a popular investment choice. Whether you are a lessor (landlord) or lessee (tenant), there is much to consider when entering into a retail or commercial lease.
Some commercial leases are classified as “retail” and fall under specific legislation – in Queensland, the Retail Shop Leases Act 1994. With the increase of retail shopping complexes over recent years, these laws were introduced to improve the position of a lessee in circumstances that often favoured a dominant owner of a retail centre.
Lessors leasing retail premises have specific obligations such as issuing perspective lessees with certain disclosure information and documents prescribed by the legislation. The laws also set out other compliance matters such as minimum lease terms, how rent reviews operate, and assignment provisions.
Many lease disputes arise because the parties are unaware of their rights and responsibilities, or the terms of the lease are ambiguous.
Below are some tips and traps flagged for important issues for lessors and lessees to consider. The information is for general purposes only, and we recommend involving a solicitor in the preparation or review of any documents, before signing a lease.
The Term of the Lease
The term of the lease and renewal options must be considered carefully by the parties. From a lessee’s perspective, the lease term should match the lessee’s plans for their business. For example, if the premises will be used to run a franchise business, then the terms of the franchise agreement and renewal options should ideally coincide with those contained in the lease.
Leases containing an option to renew will set out a time period within which the lessee can exercise (give notice) of the option. Option periods are generally construed strictly by the courts and should be diarised to avoid missing out on renewing the lease.
Lessors should review lease terms and consider their investment strategies, loan commitments and any other plans to sell the property in the future. If a proposed sale is imminent, then consideration can be given as to whether the property is more marketable with a long-term lease or one that will expire before or soon after the property is transferred. Renewal and expiry dates should be diarised to plan for the marketing of the property to perspective new lessees, to avoid lengthy vacancy periods.
When defining the area to be leased (and to avoid doubt about what area is being leased), the premises must be accurately described. This means including details such as the shop or unit number, the building name, street address and full legal real property description. Where the lease premises forms part of a larger space, a floorplan should be attached to the lease with the relevant areas highlighted and noting the measurements and dimensions of the lettable area.
The lease should also include terms regarding the agreed use of car spaces, storage facilities and common areas or amenities to be shared with other lessees.
Pemitted Use of Premises
The lease should clearly state the permitted use of the premises. Despite what is noted in the lease, it is the lessee’s responsibility to ensure the proposed lease of the premises complies with any council or other government regulations and that any necessary licenses are obtained.
Outgoings
The responsibility for payment of outgoings is a common trap – the parties should be clear about who must pay for what and in what proportions. Disputes are usually resolved by interpreting the terms of the lease, so careful drafting now will reduce costly misunderstandings in the future. Outgoings for which lessees are generally responsible include utility services, certain ongoing repairs and maintenance (such as air-conditioning equipment), council rates and water charges, cleaning, gardening and security. A lessee may be responsible for all or a portion of these services and an estimate of outgoings should always be obtained prior to committing to the lease. In Queensland, lessors are prohibited from recovering their “Land Tax” for retail leases.
Rent and Rent Reviews
The obligation to pay rent is an essential term of the lease. The frequency and method of reviewing the rent annually should be clearly stated. Rent review methods are usually by increases in the Consumer Price Index (CPI), a fixed percentage or market review on the anniversary date of the lease commencing. Most lessors request rent monthly in advance, a security bond, bank guarantee or a combination of these to ensure compliance with the lessee’s obligations under the lease.
Fit Out and Refurbishment
Lease negotiations often involve the fitting out of premises for the proposed use by the lessee. Any agreement reached should be documented and include:
1. the fixtures and fittings to be installed including reference to the agreed quality and standards;
2. who is responsible to carry out the work and pay for it - lessors should sight and approve fit out plans;
3. whether a rent-free period is allowed while the fit out work is being carried out; and
4. the obligation for refurbishment or to restore the leased premises to its original condition at the end of the lease.
Checking the Facts, Registration and Consents
Lessors and lessees need to know who they are dealing with. Your lawyer will review the searches, plans and company searches to confirm that the parties and premises in the lease document are accurate. A title search from the Department of Resources will show other interests in the property such as a mortgage or easement or registered lease. If the property is mortgaged, then the bank’s consent will be required, and expired leases should be removed upon registration of the new lease.
Conclusion
Leases should be in writing and include all terms that have been agreed between the parties. Investing time and effort to have your lease reviewed before allowing or taking possession of premises, may avoid potential disputes, inconvenience and future loss. If you need expert advice regarding a commercial lease, please contact us.