These notes are derived from Andrew Lang, ‘Commercial Leases’ (Practice Paper No P204, College of Law, July 2015) [P204.30]–[P204.55], [P204.125]–[P204.170], [P204.235]–[P204.260], [P204.285]–[P204.300], [P204.305]–-[P204.345], [P204.370]–[P204.375].

The Retail Leases Act 1994 (NSW)

  • If the Retail Leases Act applies:
    • Certain preliminary steps need to be taken before entering into a lease.
    • Several aspects of the lease are governed or affected by provisions in the Act including:
      • The Retail Lease Bond Scheme providing for cash bond funds to be held and invested by the Director General of the Department of Industry, Skills and Regional Development NSW: pt 2A.
      • Specific provisions relating to fit-out, disturbance, relocation, advertising and promotion statements, and assignment.
    • If the lease is inconsistent with mandatory provisions of the Retail Leases Act those provisions are void to the extent of any inconsistency: s 7.
    • The lease is affected by provisions relating to dispute resolution and termination: pt 8.
  • Many aspects of commercial leases are not affected by the Act.

Application of the Retail Leases Act

  • The legislation governs retail shop leases and agreements for lease (as defined in s 3).
  • It applies to head leases and subleases.
  • It applies whether or not there is a right of exclusive occupation.
  • Section 3 defines a retail shop as premises that
    • are used or proposed to be used wholly or predominantly for carrying on one or more prescribed businesses, or
    • are used or proposed to be used for the carrying on of any business in a retail shopping centre.
  • A retail shopping centre is a cluster of premises with the all of the following attributes:
    • At least five of the premises are used wholly or predominantly for the carrying on of one or more prescribed businesses.
    • The premises are all owned by the same person or have the same lessor/head lessor, or comprise lots within a single strata plan.
    • The premises are located in one building, adjoining buildings or buildings separated by areas owned by the owner of the shops.
    • The cluster of premises is promoted or generally regarded as a shopping centre, mall, court or arcade.

Schedule 1 businesses

  • Shops, stores and supermarkets — most shops are covered.
    • Shops may be listed under a different category:
      • Chemist — pharmacy.
      • Hiring — equipment hire, etc.
      • Sweets — confectionery.
    • Various shops are included in ‘Shops selling/providing/renting’.
    • Some entries are ‘A and B’ entries, and these probably cover shops that deal in one or the other:
      • Crafts — arts and crafts.
      • Formal wear hire — costumes and formal wear hire shops.
  • Eating places and food outlets — almost all will be caught by restaurants, cafeterias, coffee lounges, food courts and other eating places.
  • Service providers are almost all court:
    • Art galleries (if businesses).
    • Barbers, beauticians and beauty therapists.
    • Boot and shoe repairers.
    • Dry cleaners, collection centres for dry cleaning, and laundry services.
    • Engravers.
    • Fast-photo processors.
    • Hairdressers.
    • Lottery agencies.
    • Optometrists.
    • Photocopy shops.

Any business in a retail shopping centre

  • Commercial buildings containing shops and offices are not necessarily a retail shopping centre.
  • A shop used for a prescribed purpose in such a commercial building will be governed by the Retail Leases Act.
  • Leases over other premises in that building will not be governed by the Act unless they are also for a prescribed purpose.
  • All offices in a retail shopping centre, regardless of use, will be governed by the Act.

Exemptions

  • The Retail Leases Act does not apply to:
    • Shops that have a lettable are of 1,000 square metres or more: s 5(a).
      • Lettable area does not include car parking spaces, or storage areas not attached to the retail shop premises: s 3.
    • Any premises in an officers tower that forms part of a retail shopping centre: s 5(d).
      • The Act does not specify what constitutes an office tower.
    • Leases for less than six months without a right of renewal: s 6A(1).
      • The Act applies where, under successive, extended or renewed leases, the lessee is in continuous possession for more than a year: s 6A(2).
    • Leases for a term of 25 years or more (including options for renewal): s 6(1)(b).
    • Leases entered into before 1 August 1995: s 6(1)(c).
      • The dispute resolution provisions do apply: s 63(2).
    • Leases entered into under an option granted or agreement made before 1 August 1994: s 6(1)(d).
      • The dispute resolution provisions do apply: s 63(2).
    • Shops used wholly or predominantly for the carrying on of a business by the lessee on behalf of the lessor: s 5(b).
    • Shops operated by a person within premises, the principal business being a cinema, bowling alley or skating rink operated by that person: s 5(c).

Leasing procedures and disclosure requirements

  • The Building Energy Efficiency Disclosure Act requires mandatory disclosure by constitutional corporations and the Crown of the energy efficiency of large commercial office buildings (minimum lettable area of 2000 square metres) on sale, lease or sublease.
    • Obligations are imposed on owners and lessees of ‘disclosure affected buildings’ and ‘disclosure affected areas of buildings’: BEEDA ss 11–12, 15.
      • They are required to disclose energy efficiency information to prospective purchasers and lessees by having a valid and current ‘building energy efficiency certificate’ registered on the Building Energy Efficiency Register at the time they offer a building or area for sale, lease or sublease, and to include an energy efficiency ‘star rating’ in an advertisement.
    • If letting or subletting to a constitutional corporation, a building energy efficiency certificate must be provided if notice is given that one is required: s 12.
  • The lessor (or agent) should not advertise premises for lease or negotiate for a lease unless a copy of the proposed lease is in the possession of the lessor (or agent) and is, along with a prescribed or identified retail tenancy guide, made available to any prospective lessee when they enter into negotiations: Retail Leases Act s 9.
    • The draft does not include details of the lessee, rent or lease term: s 9(a).
    • The legislation does not precluse the lessor from submitting a draft containing different provisions to the draft provided initially.
    • At least seven days before a retail shop lease is entered into, the lessee should be given a disclosure statement in the prescribed form in sch 2: s 11(1).
      • The disclosure statement should be prepared and supplied at the same time as the draft lease; receive a signed and dated acknowledgment of receipt.
    • A lease should not be entered into until at least seven days after the lessee receives the disclosure statement.
      • If given on a Saturday or Sunday, the seven days end on the Monday after the following Sunday: Interpretation Act 1987 (NSW) s 36.
    • Under s 11(2) a lessee has the right to terminate the lease within six months if
      • a disclosure statement was not given at least seven days before the lease was entered into,
      • the statement was incomplete, or
      • the statement contained information that was materially false or misleading.
    • There are penal sanctions for failure to comply with the requirements for giving the disclosure statement: s 11(6).
  • The lessee must give to the lessor a disclosure statement: s 11A.
    • The statement must be given within seven days after the lessee receives the lessor’s disclosure statement, or within a period agreed between them: s 11A(1).
    • The form is prescribed in sch 2 pt 2.
    • Failure to comply is an offence with a maximum penalty of 50 penalty units: s 11A(3).
      • This is probably only enforceable against a prospective who subsequently enters into a retail lease (poor drafting).
    • Best practice is not to entire into a lease until the lessee has given the disclosure statement.
  • The minimum term of a retail shop lease including options for renewal is 5 years: s 16.
    • A lease shorter than this requires a certificate from a lawyer or licensed conveyancer not acting for the lessor is required: s 16(3).
      • This certificate can be given before or within 6 months after the lease was entered into.
  • If the lease is not to be registered the lessor should provide to the lessee an executed copy of the ‘stamped’ lease within a month of it being returned after payment of duty: s 15.
    • If it is to be registered it must be lodged for registration within a month of stamping and an executed, ‘stamped’ and registered copy should be provided to the lessee.
    • The obligation to have a lease stamped with duty was abolished from 1 January 2008 but s 15 has not been amended to reflect this.
  • The lessor has a limited entitlement to preparation costs for a lease, renewal or extension: ss 14, 45.
    • The lessor cannot accept lease preparation costs: s 14(1).
      • These are legal or other expenses incurred in connection with the prepration/entering into of a retail shop lease, except for registration fees under the Real Property Act 1900: s 3.
    • A lessor can require payment for lease preparation expenses incurred in making an amendment to a proposed lease if requested by the lessee/proposed lessee: s 14(4).
      • This does not apply to:
        • Amendments to insert or vary the particulars of the lessee, the rent or the term.
        • Amendments to remedy a failure by the lessor to include or omit a term as agreed between the parties.
        • Amendments requested before the lessor is given a lessee’s disclosure statement.
    • If there is such a liability for costs, the lessor must provide the lessee with a copy of any account presented to the lessor in respect of those expenses: s 14(5).

Drafting and negotiating commercial leases

  • A commercial property is an investment for lessors:
    • The returns on the property determine the success of the investment and the value of the property for sale and mortgage.
    • Secure and successful lesses under long-term leases make management of the property easier and enable it to be sold and mortgaged more easily if required.
  • Obtaining a sufficiently lengthy and satisfactory lease is relevant for a lessee’s ability to continue to trade in the premises and sell the business in future.
  • Drafting and negotiating commercial leases is a sophisticated task; a few words in the lease can have major practical and financial consequences.
  • The cost of the goodwill acquired and the costs of establishment are often comparable to the cost of purchasing a domestic residence.
  • The adequacy of the lease terms becomes significantly more important when the lessee wishes to sell the business or assign the lease.
  • If the lessee is a government body the lease will need to be a ‘green lease’.
    • It will need to include covenants that improve environmental performance and sustainability of the leased premises.
    • Provisions will be needed for energy and water saving and fit-out.

Role of the lessor’s solicitor

  • Promptly submit documents.
  • Attend promptly to any queries or requests for amendment by the lessee’s solicitor.
  • Have the lease or agreement for lease finalised and executed as quickly as possible.
  • When preparing leases or engrossments for execution ensure that:
    • The agreed amendments are all incorporated accurately.
    • The engrossed lease does not contain errors or omissions due to computer error.
    • When leases in a building are required to include a provision for the sake of uniformity, the provision is included in each lease.
    • If intended to prohibit the use of premises for a competing use, that the prohibition is inserted in all other leases.

Role of the lessee’s solicitor

  • Ensure that the final version of the lease correctly represents the agreement and adequately protects the lessee.
  • If properly instructed, renegotiate and secure more favourable lease terms where possible.
  • Adequately explain the lease provisions to the client.
    • Detailed explanation of every provision may not be necessary, but be sure to cover aspects important for the client or provisions which are unusual.

More important lease provisions

  • Be sure to receive instructions on:
    • Subject matter of the lease (premises, rights of access, amenities, parking, common areas).
    • Term of the lease.
    • Existence of any option for renewal including terms, whether it is binding on successor and assigns, and the basis of fixing rent during the option period.
    • Rent and rent review.
    • Entitlement to affix and remove fixtures.
    • Entitlement to assign or sublet, and related conditions.
    • Obligations involving the doing of work and expenditure of money.
    • Restrictions on user and ability to change user.
    • Provisions entitling the lessor to terminate the lease for any reason or relocate the lessee.

Parties to a commercial lease

  • The parties are strictly the lessor and the lessee.
  • Most commercial leases cover a wider range of parties who have an interest in the lease and its terms:
    • Successors of the lessor (eg, purchasers of the building).
    • Successors of the lessee (eg, assignees of the lease).
    • Guarantors (typically of the lessee’s obligations).
    • Mortgagees over the property, whose consent is usually required to the lease (and may assume the role of lessor after mortgage default).
    • Mortgagees over the lease, who have advanced money to the lessee on the security of the lease (and may assume the role of lessee after default).
    • Sub-lessees, because of restrictions on the entitlement to sublet in the lease, the consequences of default, and obligations not to breach the head lease.

Drafting a lease

  • There are some implied covenants in the Conveyancing Act 1919 (NSW) ss 84, 84A, 85 and some short forms of covenants in sch IV pt II ss 86–87.
    • These are used less and less frequently due to their insufficient detail and out-of-date content.
    • It is preferable to rely on express covenants relating to each topic covered in the lease.
    • Implied covenants should be expressly negatived.
  • There is very little room for implication of terms in a commercial lease; the lease should cover every topic in express terms and sufficient detail.
  • Many commercial leases incorporate terms included in a memorandum registered under Real Property Act s 80A.
    • This shortens the lease document which needs to be submitted, executed and registered.
    • It does not simplify the negotiations, and will need to be read together with the lease when explaining to clients.
  • Do not use unduly lengthy and complex lease documents; they must be adequate but not unnecessarily complex.
  • The trend is toward lease provisions which are fair and reasonable to both parties.
  • If a standard form of lease is used:
    • It will contain provisions commonly found in commercial leases, whether or not the Retail Leases Act applies.
    • Amendments may be needed to take into account client requirements and provisions of the Retail Leases Act.
      • These may be included as special conditions.
      • Precedents of special conditions are available from the Law Society.

Submitting a draft lease

  • For a solicitor submitting a draft lease or agreement for lease on behalf of a lessor:
    • The draft should accurately represent the lessor’s instructions.
    • The draft should be submitted as soon as possible after instructions are received.
    • It should be made clear that neither party is bound until execution of the finalised document by both parties.

Negotiations

  • After a draft lease has been submitted the main objectives of discussions and correspondence between parties’ lawyers should be to:
    • Ensure that the draft, as altered, covers the parties’ agreement.
    • Ensure that foreseeable problems or matters are covered adequately and fairly in the interests of each party.
    • Negotiate or renegotiate some matters.
  • If matters at issue cannot be resolved rapidly a conference between solicitors and representatives of the clients may assist.

Suggested leasing practice

  • Refer to Jim Anderson, ‘In practice: New Ruling on lease practice and procedure’ (1989) 27(10) Law Society Journal 23.
    • The original and required number of copies of the draft lease should be submitted to the lessee or their solicitor for approval.
    • A complete copy of the draft lease should be retained for execution by the lessor.
    • Any amendments agreed upon should be incorporated in all copies.
    • The lessee should execute the original and all submitted copies of the settled lease; the lessor executes another copy.
    • The lessee’s solicitor should deliver to the lessor’s solicitor the original and all submitted copies of the settled lease, duly executed and with payment for proper costs, disbursements and other agreed payments in exchange for a counterpart copy executed by the lessor.
    • The lessor’s solicitor should promptly seek to obtain execution by the lessor of the lease documents delivered to them; advise when they have been executed or of any delay.
    • If registration is required, the relevant party’s solicitor should attend to stamping, registration and required consents expeditiously.
  • The lease/agreement for lease should contain an undertaking the register the lease within a reasonable time, allowing for stamping, registration and endorsement/execution of the mortgagee’s formal consent if required.
  • The formal or informal (but binding) consent of each mortgagee should be obtained before the lessee enters into possession or expends any money in connection to the premises.

Separate representation of parties

  • Generally the lessor and lessee should have separate representation.
  • There is an inherent and actual conflict of interest involved if both are represented by the same solicitor.

Acting for the lessee when the lease should be registered

When the Retail Leases Act applies

  • Normally the lessee waits until negotiations are completed before approaching their solicitor with the draft lease, lessor’s disclosure statement and the Retail Tenant’s Guide.
  • The lessee’s solicitor must obtain detailed instructions and seek any amendments after the lease is received in its settled draft form
  • The approach is similar whether or not the lease is governed by the Act, but check that the lessee has supplied its disclosure statement to the lessor as required by s 11A.

Considering the lease

  • For retail leases, the lessee’s solicitor should get the copy of the up-front lease and lessor’s disclosure statement.
  • Thoroughly examine and understand the terms of the lease; be familiar with its terms and be able to advise on amendments.
  • The detailed study of the lease may be delayed until instructions have been obtained.
    • If a detailed study is carried out and the transaction collapses, the lessee may not be keen about paying the costs of the study.
  • If the lease is not in registrable form, request that the lessor’s solicitor puts it in such form.
  • Discuss the lease with the lessee and obtain instructions.
    • This may take time; most clients are not able to analyse the lease themselves and require explanation, advice and guidance.
    • Instructions should range over the topics covered by the lease, the lease provisions, and extraneous maters.

Searches and enquiries

  • Many searches and enquiries relating to the title, lessor and premises should be conducted.
    • These include zoning and environmental matters.
  • The title search will indicate prior leases of the premises which may still be recorded.
    • If there are leases still recorded, request that the lessor’s solicitor have them removed.
  • The title search will also reveal mortgages and indicate that consent of the mortgagee may be necessary.
  • Searches and enquiries should generally be delayed until after obtaining instructions.
    • Some may be delayed until after agreement is reached on the lease to save costs if the transaction does not proceed.
    • Which searches and when they should be made is a matter for the judgment of the solicitor.

Negotiations and amendments of the draft lease

  • If the lease requires amendment, write to the lessor’s solicitor setting out the amendments.
    • This may require redrafting, rewording, retyping or insertion of a clause effecting deemed alterations to the filed memorandum.
  • It is courteous and time-saving for the lessee’s solicitor to redraft clauses the lessee requires amended.
    • Avoid stating ‘Clause 4 should be limited to’, etc; redraft to be in the form the client wants.

Closing stages

  • Arrange for the lease to be executed by the lessee and any guarantor.
  • LPI will register a lease signed by a solicitor on behalf of the lessee, both parties’ solicitors would prefer to lessee to sign.
  • Take care to ensure that the execution is witnessed by a person who complies with Real Property Act s 117(4):
    • At least 18 years old.
    • Not a party to the lease.
    • Known the person signing for at least 12 months or taken steps to verify the identity of the signatory.
  • The Registrar-General allows use of black, dens dark blue, or blue-black pens, so long as the signatures or permanent and capable of clear reproduction.
  • The lessee’s solicitor returns all copies of the lease to the lessor’s solicitor, together with a cheque for costs and estimated disbursement if required, and evidence of required insurances.
    • It is also usual to provide a cheque for the first instalment of rent and any security bond required unless they are to be collected independently.
    • If the Retail Leases Act applies, any cash or cheque received as a security bond must be lodged with the Director General: pt 2A.
  • The lessee will want to be sure the lease is enforceable before relying on it.
    • They ideally want the lease signed by the lessor, consented to by the mortgagee, and registered before relying on it.
      • This is often not possible, so follow the suggested leasing practice above.
  • When there is a binding lease or agreement for lease or agreement for lease, the lessee usually makes arrangements for fit-out and possession directly with the lessor.
  • When the lease is received from the lessor’s solicitor, send it to the client.

Guarantees

  • The lessor may require a guarantor of the lessee’s performance of the lease.
  • A guarantee is usually required where the lessee is a company.
  • Guarantors are frequently the principal directors or shareholders of a company; usually individuals but sometimes other corporations.
  • A lessor may be concerned that the company lacks sufficient assets or is merely a corporate veil, hence requiring a personal guarantee.
  • When a corporate lessee becomes insolvent, the lessor is often able to recover outstanding rent and damages from guarantors.
  • Guarantees are frequently entered into in conjunction with commercial leases.
  • Guarantees may impose substantial liabilities for considerable periods of time.

Formal requirements

  • Guarantees are promises by third parties and require consideration or should be contained in a deed.
  • Guarantees are generally expressed in the terms that the lease was granted at the guarantor’s request and in consideration of the grant of the lease the guarantee is being given.
    • Even if this is adequate consideration to enforce the guarantee, it is preferable to draft guarantees in the form of a deed (thus not requiring consideration).
  • Guarantees can be prepared as separate instruments or incorporated into the lease.
    • If incorporated the guarantors should be come parties to the lease and should be in the form of a deed or have the effect of a deed on registration of the lease.
  • Guarantees need to be executed by each guarantor, who should be made aware of the meaning, effect and obligations, and receive independent legal advice.
  • Do not act for a lessee and guarantor unless they have the same interest; generally they do not unless the lessee is a sole director-shareholder company, and the director is the guarantor.

Protection of guarantors

  • Without specific provisions the guarantor has no protection in case of lease default and must await claims from the lessor for debt or damages.
  • The guarantor can be provided with protection or have their position improved by:
    • Providing for the guarantor an express indemnity from the lessee or a third party.
    • Allowing the guarantor to take a transfer of lease when the lessee is in default or has repudiated the lease.
    • Allowing substitute guarantors if, for example, a guarantor ceases to be a director of the lessee, or if the lease is assigned or renewed.
    • Imposing some obligations on the lessor toward the guarantor, such as:
      • That the lessor should take reasonable steps to enforce the lease against the lessee before acting against the guarantor.
      • That the lessor should forward to the guarantor copies of formal and informal notices relating to breaches or non-payments.
      • That the guarantor be entitled to participate in a rent review.
      • That the lessor should not consent to an assignment of the lease without notifying the guarantor of the application for consent and taking into consideration the guarantor’s representations and comments.

Transactions involving guarantors

  • Guarantees are relevant to transactions relating to leases:
    • Sale of the reversion.
    • Assignment of the lease.
    • Options for renewal.
  • The main issue is whether the guarantee continues.
    • Guarantors are required to execute documents when such transactions are effected.
      • These confirm the continuance of the guarantee or release the guarantor.
    • Confirmation is not always necessary and may be covered under the original guarantee.

Lease content

  • See the important lease provisions above.
  • The entire lease requires attention, even though those provisions may be priorities.

The parties

  • There may be taxation considerations in deciding who or which entity should be the lessee.
    • These should be considered before the lease is entered into.
    • This will determine who conducts the business and has tax liabilities among others.
  • If there is more than one lessee, it should be decided whether they will take as joint lessees or lessees in common (and in which shares).
    • This should be indicated in the lease.
    • If a party is a company, their ACN/ABN should be indicated in the lease.

The subject matter of the lease

  • If the premises comprise the whole of the land described in the title, reference to the title is sufficient.
  • In commercial leases the premises often forms part of a larger block (eg, in an arcade or office building).
  • Solicitors must ascertain with absolute precision the exact description of the premises to be leased to avoid ambiguity.
  • It is important to ensure that:
    • The lease does not require subdivision consent.
    • The measurement of the premises is ascertained with reference to the entire building or a comparison of lettable areas for the purpose of determining the proportion of rates or outgoings attributable to the premises.
  • A plan will be required to adequately define the boundaries of the leased area, identifying:
    • The identity and full street address of the premises.
    • The unique way in which it is designated in the plan attached to the lease or a registered dealing.
    • The plan used to define the boundary of the premises being leased.
  • The plan used to identify the premises leased must comply with Real Property Regulation 2014 (NSW) cl 9(3), sch 6.
  • Plans annexed to leases should:
    • Define the premises being leased by a unique method.
    • Be a quality reproduction of whole or part of the building, architectural plan or other plan prepared to a similar standard.
    • Show enough of the plan to adequately fix the boundaries of the premises by:
      • Reference to whole floors.
      • Reference to a floor or floors within a building.
      • Reference to walls or other structural features of a building (pillars, gutters, stairs, etc).
      • If necessary, the use of perpendicular (90 degree) dimensions related to walls or other suitable structural features.
    • Define car parking spaces, loading docks, hard-standing areas, nurseries and garden areas by appropriate designation or prolongations and perpendicular offsets related to the walls or other suitable structural features.
    • Where the premises to be leased are within a large parcel of land, sufficient information must be shown on the plan to locate the premises within the parcel boundaries.
  • Describe what is excluded from the leased premises that may be physically situated within the leased premises (eg, load-bearing columns).
  • If instructed to act on leases of multi-occupancy commercial/industrial premises in a building comprising several levels, the definition of boundaries should require consultation and expert advice.
    • This will involve the lessor and their architect or engineer to determine where the boundaries should be situated horizontally and vertically.
  • Take a wider approach to the subject matter than merely the leased premises — include and specify:
    • Entitlements of access and use by the lessee, its employees and customers to common portions of the building (passageways, stairways, elevators, toilets, car parking).
    • The lessee’s entitlements to services and facilities provided by the lessor, such as air-conditioning.
    • The lessee’s entitlements to service pipes and connections which pass through the lessor’s property or other leased premises.
    • The lessor’s entitlement to use service pipes and connections traversing the leased premises.
    • The lessor’s fixtures and chattels which may be used by the lessee and are included in the lease.
    • The lessor’s rights of access and interference with the leased premises.
    • Rights reserved to the lessor which may infringe on the lessee’s use and enjoyment of the premises and facilities provided by the lessor.

Lease term

  • The lease term (including commencement, duration and end) should be clearly specified, as should options for renewal, their duration and conditions for exercise.
  • Seek advice on the adequacy of the lease term and option, having regard to the nature of the business and set-up/relocation costs.
  • It may be appropriate (subject to instructions) to negotiate to secure a longer lease term or additional options for renewal, a right of pre-emption, and an option to purchase.

Option to renew the term

  • Duration and preconditions of an option for renewal should be clearly specified.
    • Preconditions usually include a period during which the option is to be exercised.
      • The period should be sufficiently long and prior to the end of the lease so each party knows in advance whether the lessee intends to continue in the premises.
  • Compliance by the lessee with the precondition relating to lease covenants depends on the precise terminology of the requirement as expressed in the option; this may be:
    • (Preferred by lessors’ solicitors) That the lessee must have punctually paid rent and observed the covenants in the lease
      • throughout the lease term, or
      • up to the date of exercise of the option.
    • (Preferred by lessees’ solicitors) That there is no subsisting breach of any lease covenants by the lessee at the date of serving notice of exercise of the option, and that the lessee must have observed the lease covenants from that date to the expiry of the current lease term.
  • The option should specify the terms of the renewed lease (which will usually be the same as the original lease); ensure that:
    • The machinery provided for the fixing of the new rent is comprehensive and enforceable.
    • Any additional or different terms are clearly specified in the option clause.
    • Any further options for renewal are clearly specified in the original lease and a perpetually renewable option is avoided:
      • When there is a single option for renewal indicate that the renewal is on the same terms except for the option clause.
      • When there are several options for renewal, specify the duration of each by date.
    • The arrangement for payment of legal costs and disbursements of the renewed lease is specified in the option clause or is adequately governed by the lease.
    • The need to register the new lease or extensions of of lease if required is expressly indicated in the option clause.

Rent and rent review

  • Specifying rent and when and how it is payable is usually straightforward.
  • Any lease incentive/rent-free period should be carefully documented.
  • If there is a turnover or percentage rent, it should be carefully drafted and there may be several matters that the lessee’s solicitor should seek to amend.
  • The lease should include adequate provisions for abatement of rent, to cover periods where the premises are rendered wholly/partly unusable.
  • Rent review can create considerable problems in drafting and litigation.
  • The frequency of rent review should be clear; usually 24, 30 or 36 months, unless there is an objective review such as CPI in which case 12 months may be appropriate.
  • Ratchet clauses that prevent rent from reducing below the existing rent are prohibited under the Retail Leases Act s 18(4).
  • Implementation of the rent review should not be solely at the lessor’s discretion; the lessee should have an independent entitlement to implement a rent review and that rent may decrease.
  • Appropriate mechanisms and criteria for the rent review should be included.

Rates, taxes and operating expenses

  • The lessee is usually required to contribute to the lessor’s expenses in connection with the property.
  • Expenses may be confined to rates and taxes or may extend to other operating costs.
  • Some basic matters for instructions are:
    • What expenses should be paid fully by the lessor and which ones should be fully or partly reimbursed by the lessee.
    • How the lessee’s share should be determined.
    • How the lessee’s share should be collected and paid, and how any shortfall, overcharge or error in assessment be adjusted.
  • Outgoings can be a relatively large percentage of the rental income and create a substantial financial obligation in addition to rent.
  • Outgoings can increase over the years, sometimes dramatically.
  • Unless a lessee has a long term lease over an entire building and with subletting rights, it is probably inappropriate for them to reimburse the lessor’s costs for:
    • Structural repairs to the building.
    • Repairing inherent defects.
    • Statutory charges for providing kerbs and gutters outside the property.
    • Abating a nuisance emanating from the property not caused by the lessee’s activities.
  • Instructions and drafting should focus on:
    • Including a fairly comprehensive list of operating expenses to which lessees should contribute, and a general provision to cover similar other expenses not expressly mentioned.
    • Ensuring that items for which lessees are not responsible are clearly specified.
    • Ensuring that it is clear whether the lessee does or does not reimburse the lessor for GST payable on operating expenses.

User

  • Commercial leases generally restrict the use of the premises.
    • If not, they may be used by the lessee for any lawfully permissible purpose.
  • It is important that the premises are legally and physically suitable for their intended purpose; consider:
    • Existing approvals that apply to the premises.
    • Conditions of approval (eg, hours of use).
    • Whether the intended use involves change of use.
    • Whether development or other approvals are required by the lessee.
    • Whether the lease should be subject to the lessee obtaining necessary approvals.
  • Suitability also involves:
    • Whether any building alterations are necessary; what is required; the cost; conditions of approval; liability for cost.
    • Whether the premises comply with fire, health and safety regulations and any other requirements of licensing legislation.
    • Consideration of the impact of regulations dealing with pollution, emissions, noise, vibration and compliance costs.
    • Issues relating to factory/shop registration, including whether the requirements as to facilities and amenities are or can be satisfied, having regard to the nature of the business and the number of employees.
    • Fitting out the premises for the lessee’s purposes, including installation of, and entitlement to remove, fixtures.
  • The use of the premises may include the activities which are engaged in on the premises and in the building by the lessee, its employees and its customers.
    • Consider installation of signs and advertising material, hours of trading, access to the premises outside normal hours, public address systems, cleaning and waste disposal.

Assignment, subletting and mortgage over lease

  • If a lease contains no restriction on assignment is is generally freely assignable by the lessee.
    • This is undesirable for the lessor, who will want to retain some control.
      • The lessor will be concerned about the quality and reliability of the occupants.
  • Lessees will want to be able to assign the lease for reasons such as:
    • The premises becoming unsuitable for their purposes or business.
    • They may want to retire, sell the business, or relocate.
  • A reasonable entitlement to assign the lease is essential.
  • Leases normally permit assignment, subletting or mortgaging with the lessor’s consent.
    • Some lessors will require an absolute covenant against these dealings.
      • Resist these covenants, but be willing to negotiate (assignment but not subletting may be acceptable to the lessee).
  • If a lease prohibits assignment without consent:
    • Consent can be withheld only in certain circumstances for a retail lease: Retail Leases Act s 39(1).
    • Consent cannot be unreasonable withheld in the case of a non-retail lease: Conveyancing Act s 133B.

Transfer of lease

  • Lessees can transfer/assign a lease.
  • A transfer of lease without consent of the lessor may breach the lease.
  • A transfer of lease without consent of a mortgagee may breach the mortgage.
  • Leases are normally transferred as part of a sale of the lessee’s business, or their fixtures, fittings and chattels.
  • Transactions normally involve solicitors acting for:
    • The lessee (assignor).
    • The transferee (assignee).
    • The lessor.
    • Any mortgagee.
    • Possibly guarantors.
  • The assignee is entering into a new lease transaction on the terms of an existing leads.
  • If the lease is registered the lessee is the proprietor of the land under the Real Property Act and can transfer the lease under section 46.
  • If the lessor consents it will usually require a covenant by the transferee to perform and observe all the covenants and conditions of the lease.
    • Some convenants and conditions will automatically bind the assignee, but others might be argued to be personal to the original lessee.
  • When the transfer is lodged for registration there is no need to arrange the production of the lessor’s certificate of title or to lodge the lease with the transfer.
    • If a folio of the Register has been created for the leasehold interest, the lessee’s certificate of title must be lodged.

Assignor’s disclosure statement

  • If the assignment is in connection with the lease of a retail shop that will continue to be an ongoing business, the Retail Leases Act provides for the lessee to give an assignor’s disclosure statement to the proposed assignee and the lessor: Retail Leases Act s 41.
    • This is not obligatory — ‘may’ is used to be discretional.
  • There is a benefit — the assignor and guarantor will not be liable to pay the lessor any money payable by the assignee to the lessor: s 41A(1).
    • The benefit ceases if the assignor’s disclosure statement contains information that is materially false or misleading or incomplete: s 41A(2).
  • There is a prescribed form of disclosure statement: see Retail Leases Act sch 2A.