A lease is a grant by the owner to the lessee of an interest in land. A sub-standard lease can detract from the value of a landlord’s property or erode the viability of a tenant’s business. Expert drafting is essential.

We are expert at delivering to landlords and tenants robust and compliant lease documentation for all types of commercial, retail and industrial property.

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Commercial Leases

Expert preparation of office space leases in new premises, on stand alone sites and community title locations are all efficiently completed exactly as to required specifications. Simply provide a copy of letter of intent essential terms so that the job can be completed as quickly as you would like to have it up and running.

Commercial leases are regulated to a far less extent than those in the retail context. There are nevertheless numerous issues – that apply to all types of leases – that need to be considered:-

Lease in writing

Leases must be in writing to be enforceable but do not need to be formal. A lease be constituted for example, by an exchange of correspondence or emails or a single one page document, as long as they it is effectively “signed”.

A “Letter of Intent” is a pre-lease document that specifies start date, period of lease, estimated floor area, names of lessor and lessee, annual rent, proportion of outgoings, period of lease, option periods etc.

Some “Letters of Intent”are able to be enforced as a lease if one is not subsequently signed.

Usually however the Letter of Intent is in the form of an offer by the prospective lessee to accept a lease on the terms stated from which the formal lease documents are prepared.

Consumer protection

Lessees who are “small businesses” with up to a maximum 20 staff including casuals, will likely attract the “unfair terms” prohibition mandated in the Australian Consumer Law if the total rent for the period of lease does not exceed $1 million.

Registration

Lease registration is in many cases not mandatory but can provide additional protection to landlords and tenants.

If for more than 3 years (excluding options), the lease is – under Queensland law – required to be registered. Registration conveys to the lessee, an “indefeasible” title to a leasehold estate in the land. Lease registration is handled differently in each State.

Short-term leases for terms three years or less or periodic leases eg year-to-year, have indefeasibility without being registered.

Registration of all leases that contain options to renew is recommended for tenants so as to protect the right to exercise the option. Without registration, such options can be ignored by a person who buys the premises from the original lessor.

See below for an explanation of other common features of leases

Retail Leases

The special features of retail leases require the utmost diligence in their preparation.

A “retail shop” is a reference to premises of less than 1000 m² floor area used predominantly for one of the numerous retail business types described in the Retail Shop Leases Regulation. It can also include premises that aren’t retail in nature but are situated in a “retail shopping centre” comprised by at least five tenancies, but only if more than 25% of the floor space on the same floor level are utilised for retail. The special rules that apply include the following:-

  • Landlords cannot charge tenants for lease preparation legal fees or the cost of obtaining its mortgagee’s consent to the lease. Legal fees for lease preparation can however be recovered if after giving its go ahead, the tenant declines to sign the lease;
  • Pre-lease disclosure is mandatory. See below;
  • Tenants are required to obtain legal and financial advice before entering into the lease and must obtain certificates to that effect;
  • Rent reviews and escalation are regulated. See below;
  • Tenants gain protection in relation to the exercise of options. See below;
  • Assignors and their personal guarantors can be released from future liability.See below;
  • Compensation is payable by the lessor in the event of business disturbance, demolition or relocation;
  • Make good obligations at the end of a tenancy are clarified. See below;
  • Disputes can be adjudicated by the Queensland Civil and Administrative Tribunal (QCAT).

Disclosure

Sub-lessees, franchisees and assignees are also entitled to pre-lease disclosure from the landlord. Likewise a sitting tenant who exercises a renewal option. When a retail business is sold, its owner must give the buyer – in its capacity as assignee of the lease – and “Assignor Disclosure Statement” and a copy of the current lease before entering into the business sale contract.

There disclosure is required to be given to the incoming tenant at least 7 days before entering into the lease. This period can be shortened by the incoming tenant so as to permit the disclosure to be given immediately prior to its entry into of the lease. But if given after that time or if it is materially incomplete or misleading, the landlord may be required to pay the tenant “reasonable compensation” and the tenant may be able to terminate the lease.

Rent reviews

The following rules apply to rent reviews in retail leases:-

  • Rent cannot be escalated according to whichever of two or more methods would result in a higher rent;
  • Rent reviews to “market” must be conducted by a Specialist Retail Valuer according to a statutory methodology;
  • A method of review that prevents any rent decrease is void.

Options

When a tenant exercises an option – unless rent has been agreed in advance – the tenant takes the risk as to level of rent that will be determined in the “market” review process.

In a retail lease the tenant can – six months prior to the option exercise date – request the lessor to determine the “market rent”. Regardless of the period specified in the lease, the tenant is then entitled to exercise its renewal within 21 days of its receipt of the written market rent determination.

the tenant can from then on site to accept the rent as determined, negotiated different rent for the renewal period or decide not to renew.

Release of assignor

On assignment of a lease, the assignor generally retains liability to the landlord should the assignee default – at least up until the end of the original lease term. In the retail context, provided an assignor complies with its disclosure obligation to the assignee of the lease, the assignor and its personal guarantors are immediately released from this potential liability.

Make good

All leases contain make good provisions i.e. an obligation on the tenant to restore the premises to their pre-lease condition. Such a provision in the retail leases however avoid unless particulars of the nature and extent and timing of the work required to be done is clearly set out.

Industrial leases

This type of lease is a species of a commercial lease that concerns a warehouse, factory or workshop type location. It has none of the special tenant protections that apply to retail leases but has all features common to other leases.

Particular requirements may be needed in relation to the particular site of the tenant’s business for example in relation to fire prevention, waste disposal, contamination, hardstand areas, modifications, stormwater and utilities.

Because industrial leases are often for a long-term, the documentation must be sufficiently robust and at the same time retain flexibility to accommodate a change over time, in the nature of the tenant’s business.

Although it is an issue in drafting all leases, consideration of what constitutes a “capital” expense as opposed to maintenance deserve special consideration when preparing an industrial lease. The question arises frequently in relation to ageing air-conditioning equipment happens to whether it is reasonable to continue to require tenants to meet repair costs or whether “uneconomical repairs” should be born by the landlord because they are essentially “capital” in nature.

Airport leases

Leasing of maintenance and workshop space at airports requires industry knowledge which only comes with experience.

All of the elements discussed above need to be considered to ensure – whether acting for a landlord or a tenant – the documentation produced meets the requirement of this type of use and the particular building in which the business is to operate.

Retail space at airports also requires special consideration when documenting or reviewing the premises lease, mostly dependant on the nature of the business, the term and whether or not the demise is by way of sub-lease.

Issues to consider in every lease

Leased area & rent

A lease does not need to specify an accurate floor area unless the lease is intended to be registered.

Most leases will however specify a floor area. If the space has only recently been constructed or remodeled, the Letter of Intent may specify an estimated area that is “subject to survey”. It may also specify that the rent is to be calculated by reference to the survey floor area and a specified annual rent per square metre.

In those cases the survey will proceed before the lease is lodged for registration so the floor area and rent details can be inserted prior to lodgement.

Tenants may or be asked to pay the cost of the survey.

Term

Most often leases are for 3 years or for 5 years. Frequently they contain one or more options for the same number of years.

Once a tenant signs up to April binding lease for a particular term, it is obliged to pay rent for the entire term regardless of whether or not it continues in occupation.

Rent escalation

Landlords are entitled to expect rental growth and this may be accomplished by allowing for annual rent increases (usually on the anniversary of the commencement date) either in accordance with CPI increases, a fixed percentage or a “market review”.

Outgoings

Some leases specify that the tenant must also pay a proportion of outgoings for the building in which the tenancy is located. Usually the share of outgoings is the proportion which the floor area of the leased premises bears to the total lettable floor area of the location.

Documentation deposit

Most offers the lease must be accompanied by a deposit which is credited towards the lessee’s rent obligations if the formal lease is negotiated and signed quickly or if not, is paid to the less the or to defray its legal expenses.

Personal guarantee

If the lessee is a company, the landlord will usually require that its directors provide personal guarantees.

Bank guarantee

A landlord may also require bank guarantee to be provided to cover 3 months or 6 months of rent in the event of default. This allows the landlord to go to the tenant’s bank and collect cash to compensate it for the default, up to the maximum value of the guarantee.

Registration

The same considerations as to the benefit of lease registration as apply to Commercial leases (see above) also apply in the case of retail leases.

Additional tenant protection

Lessees who are “small businesses” with up to a maximum 20 staff including casuals, will likely attract the “unfair terms” prohibition mandated in the Australian Consumer Law if the total rent for the period of lease does not exceed $1 million.

Letter of intent

The most common way of entering into retail or commercial leases is firstly by way of “Letter of Intent” which sets out the fundamental commercial terms: start date, term, estimated floor area, names of lessor and lessee, annual rent, proportion of outgoings, options, read escalation mechanisms and guarantee requirements.

The Letter of Intent is usually in the form of an offer by the prospective lessee to accept a lease on the terms stated.

Because the formal lease contains the numerous obligations etc that can’t be included, a countersigned Letter of Intent is usually not a final document. A binding Letter of Intent is also possible, if preferred.

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