LEC 7: Commercial Leases (Part 2)

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1

LEC 7: Commercial Leases (Part 2)

Preparation of the lease

Acting for Lor


where L reg:

If retail lease:



Prep draft L before advertising prem



Prep Lor’s disclosure statement



Give Lee


draft L, disclosure statement, retail
tenancy guide



Get Lee to sign ac
knowledgement of receiving



Only enter L after 7 days above



Lor should get Lee’s disclosure statement
BEFORE entering L: s11A

Prep L:



Get main particulars: either from Lor or leasing
agent



If part of shopping centre etc


established form
of L?



Form:

o

Standa
rd form: Law Society (retail and
non
-
retail prem)

o

If reg


prep in registrable form

(LPMA
form)

o

May contain all terms or refer to memo
filed under s80A RPA



Attend to amendments by Lee + no errors

o

If L in building with uniform provision


ensure in L

o

If pr
ohibit competing use by other L


ensure in all other Ls.

Searches



CT:

o

If Mg
-

need consent +

n
eed Mgee to
produce CT when registered L



L not binding on Mgee unless
Mgee consents before rego: s53(4)
RPA

o

If any other L on CT

o

If any covenants/restrictions



Ot
her searches: Lee and Guas


bankruptcy,
winding up, judgments



Ensure L finalised/executed

Send L:



Get Lor to execute:



If need Mgee consent


send draft L to Mgee for
consent

o

Also advise re need to produce CT and
when



Send original L to Lee for approval +

execution
Acting for Lee


where L reg:

If retail lease:



Lee usually approach you after getting draft L,
Lor’s disclosure statement and retail tenancy
guide



Check they hav got those things


req by s11A
RLA

Examine L:



Peruse L + discuss with client

o

Ensure L adequately protects Lee

o

Explain L provisions to client.



Check if L in registrable form

Searches:



CT:

o

Old L still on title

o

If any Mgee and need consent?

Finalising L:



Get L signed by Lee and any Gua



Execution must be witnessed: s117(4) RPA


over
18, not party to L, known signor for 1yr



Return all copies to Lor + cheque for
costs/disbursements.



May also send 1
st

rent or security bond (unless org
with Lor independently)



Receive registered L from Lor


send to client.


2

(“draft L”)


if refers to Memo, include copy



Send copy to Lor



Send bill to Lor


may fwd to Lee to pay

Finalising L:



Receive signed L + costs from Lee

o

Pay costs into trust (not office yet)

o

If includes 1
st

rent


send to Lor

o

If security bond


r
egister with Rental
Bond Board



Check L properly signed



Register L at LPMA


LPMA copies and returns



Send registered copies to Lor and Lee



Confirm with Lor:

o

Advice re important features of trans


rent review, rates, operating expenses,
options for renewal

o

Future dates etc


Acting in unreg L:

Differences



No need to be in registrable form



Should be in form of Deed



Only 2 copies need execution (1 held by each party)



L is short


use less complex L + less searches etc

Acting in Agt for L



If retail L


need Lor’s disclosure statement etc.



Lor prep draft Agt fo
r L (with L attached)



After negotiations + searches


prep final doc for execution

o

Work out arrangements for costs

o

Work out whether L will be resgiered

o

Get Mgee’s consent



Should have 2 copies fully executed by
both

parties (OR can execute/exchange)



Duty:

o

If premium given under nonretailL



o

Agt has ad valorem duty, copy has $2,

o

L has nominal duty


must produce stamped agt when stamping L



Prudent: Lee NOT move into occupation or spend money on fit out yet!

Drafting a Lease:



Implied covenants (s84,84A and
85 CA) and short form of covs (s86, 87) BUT should rely EXPRESS
covenants covering every topic.



Do NOT be unduly lengthy/complex


but needs to be adequate



Use plain language!



Submitting draft L to Lee

o

Ensure it accurately reflects Lor’s instructions

o

Submi
t asap

o

Make clear that neither party is bound under execution:
This draft is submitted on the basis that
neither party is bound and each may withdraw from negotiations until the final terms of the lease
have been agreed on and the lease has been executed b
y both parties.

Negotiations for Lee sol:


3



Ensure Lee protected: Lor covenant for quiet enjoyment, abatement of rent



Ensure default provisions not too harsh/unreasonable

o

Eg. period for default (7 days is unreasonable)


maybe only if breach for substantial
time?

o

Eg. req Lee to insure Lee’s stock, fixtures, fitting (Lee’s own matter, not for Lor to enforce)

o

Eg. allow building operations


disturb Lee



Lee’s obligation to repair



o

excepts reasonable wear and tear, structural/inherent defects (should be Lor)

o

Ha
ving regard to the condition of the prem at the commencement of the L



Lee to comply with req of local authorities



o

limit to minor repairs/alterations

o

exclude structural alterations



Prevent cl which may Lee responsible for things outside their control/kno
wledge

o

Eg. cov not to do anything that would make Lor’s insurance void


limit to Lee’s wilful behaviour

Suggested practice of exchange etc



Lor send orig and req copies to Lee



Lor keeps copy for own execution



Put amendments in all copies



Lee executes orig
and copies



Lor executes copy



Lee gives Lor executed orig and copy + payment of costs etc



Lor gives Lee his executed copy



Lor executes orig + copies (already executed by Lee)

Other recs:



L should contain undertaking by Lor to reg L within reasonable time


allow for stamping, reg, execution,
Mgee’s consent



Obtain formal/informal consent of Mgee BEFORE Lee enters possession or spends money for fit out

Main Terms

Premises



Need to accurately describe premises


no uncertainty re area leased to Lee

o

May involve d
escribing horizontal/vertical boundaries (walls, floors, ceilings)

o

May involve describing what is excluded from prem (eg. load bearing columns)

o

May attach plan of prem to L


but must comply with Sch 6 of RP Regs 2008 cl 10(2)

o

May need architect/expert adv
ice if complicated multi
-
story or occupancy area.



May be whole of land or part of land (separate shops or offices under 1 CT)

o

If part, should ensure L doesn’t require subdivision consent; and

o

If part, should calculate prem area (with ref to entire building
)


for purposes of proportion of
outgoings



Wider issues


should be covered by L:

o

Entitlement to access/use of common portions


passage, stairs, lifts, toilets, car park

o

Entitlement to services provided by Lor eg. air con

o

Entitlement to service pipes/con
nections which pass through Lor’s prop or other Lee’s prop and
Lor’s entitlement to use same which traverse prem

o

Lor’s fixtures/chattels which may be used by Lee

o

Lor’s right of access/interference


which may infringe Lee’s use/enjoyment of prem



Thomas v B
ergin
(1986) ANZ ConvR 822

o

FACT: house in bush. Lee refer to postal address. Lor brought in bulldozers to subdivide
bushland. Lee complain


want injunction.

o

HELD: L only included house, garden + pool etc (NOT bush)



Ong v Luong
(1991) ANZ ConvR 596
:


4

o

FACT
: described “
Lock
-
up shop known as 38 Canley Vale Road, Canley Vale
” and use “
sale and
service of electrical appliances
”. Lor sold prem


new Lor didn’t want Lee to use backyard.

o

HELD: Lee lost



Ct look at description (lockup shop) + use

Parties



If natural
persons


full name



If a company
-

ACN or ABN



If
1+ Lee


JT or TIC (what shares?)?

o

If Lor sol


include cov that Lees jointly/severally liable

o

Grimley v Permanent Trustee Co of NSW
(1935)
:



In death of 1 Lee, liability (of cov and pay rent) passed to other

Lee. Dec’s estate free from
liability.



L may extend to wider parties incl:

o

Lor’s successors: purchasers, legal rep

o

Lee’s successors: assignees, legal rep, trustee/liquidator of Lee

o

Guarantors

o

Lor’s Mgee

o

Lee’s Mgee

o

SubLees



Execution:

Lor must execute perso
nally

Term



Duration of L
-

commencement & termination dates required

(certainty!)

-

Security of tenure

-

Consider nature of business, costs of installation/fitout, difficulty/costs of relocation

-

Lee should aim for longer L or more options

-

If L covers whole/sub
stantial part of prop


consider option to purchase?



If option


must specify length of option, number of options, preconditions for option

-

period to exercise option (usually
6
-
12mths or 3
-
6mths

before end of L)

-

notify Lor

-

no default by Lee during L



e.g.
the lessee must have punctually paid rent and observed the covenants in this lease
throughout the lease term"
or up to date of exercise of option

[more favourable to the
lessor]




e.g.
at the date of serving notice of exercise of the option there must be no

subsisting
breach of any lease covenants by the lessee" [more favourable to the lessee]



Suiga Pty Ltd v Hampden Properties Pty Ltd
(SC NSW 2.4.1997)

-

FACT: L 5 yrs + 5 yr option. Must written notify Lor of option between 3
-
6mths of end of term.
Lee gave n
otice prematurely. During 3
-
6mths sent reminder letter to Lor (but not proper notice)

-

HELD: no option


original letter was given prematurely and 2
nd

notice not in proper form

Drafting the option clause

(in orig L)



Option cl specifies terms of new L, excep
t:

o

How the new rent is to be determined



usually market rent
, valuation, arbitration

o

Any additional/different terms
for option period

o

Any further option for renewal
-

avoid a perpetually renewable option
:




option may be exercised on same terms as orig exc
ept this clause



Where several options for renewal


specify duration of each option by date “
containing 2
further options for renewal of 3 years each from DATE to DATE”

o

Arrangements for payment of costs &
disbursements of renewed lease (
if appropriate
)



NOT
E: if retail L, s45 restricts expenses payable by Lee


5

o

Need to register new L?

Giving option:



If Lee validly exercises option


Lee entitled to new L of prem in accordance with option cl.



If L short


usually just type out L again (minus option provision) +

execute



If L long


may consider:

o

If orig L reg and new L going to be reg


incorp orig L by reference to deemed deletion of option
prov: s80A(5) RPA

o

If Lee agrees


do variation instead of new L (extension of term and delete option cl)

Rent



Clearly spec
ify base rent
(bare amount paid monthly)


when paid, how paid



Carefully document any lease incentives



rent free period,



Turnover/% rent (usually common in commercial rent)
:

o

L provides that once turnover exceeds base rent by X%


Lee will pay additional

rent

o

S20 RLA: excludes certain amts from “turnover”


GST, delivery charges, discounts allowed to
customers in normal business, any refunds, returned merch, any credit charge, sale of Lee’s
fixtures/fittings, written off credit accounts, sale of lottery t
ickets etc.



Abatement of rent: if prem rendered wholly/partly unusable e.g. damage, destruction, disturbance

o

Pt 4 RLA: if prem totally inaccessible or unusable


no rent paid

o

If diminishment of prem


decrease in rent

Rent review



Usually every 2, 2.5 or 3

yrs


not annually unless objective review (eg. CPI)



Different ways of dealing with rent reviews:

o

CPI adjustment
: usually on annual increase in rent

o

Market: usually on option

o

% increase
: fixed amt

o

Review at specified time eg each 2 years



Consider: include

a
ratchet clause
?

o

Rent cannot go below X rent

o

Prohibited by RLA s18(4)



S18 RLA: cannot have provision for Lor to have discretion as to 1+ rent review methods



Consider: Lee’s entitlement to
do
rent review and provision that rent may decrease

o

S18 RLA: if pr
ov cause rent to decrease (eg. market rent), cannot have another cl which prevents it
from decreasing or limits decrease



S19 RLA: if market rent review dispute, parties cannot appoint independent market specialist to review

Fixtures



Lee may install fixture
s at beginning or during L



L should cover:

o

Initial installation of fixtures

o

Status of Lee or Lor’s fixtures


at end of L

o

Lee’s entitlement/obligation to remove fixtures (make good)

o

If Lee installs fixtures owned by Lor??



Consider: what needs to be done to

prem for Lee’s use


offices, partitions, shelving, removal, time, repair



Make good:

o

Cl cover complete restoration of prem to a base building configuration (can be fitted out to next
Lee)

o

Cl may provide cost of make good to be determined by independent su
rveyor + Lor to receive cash
payment (rather than work carried out by Lee)

Signs



Size/nature of signs should be negotiated + agreed.


6



May need Council and Lor approval before putting up signs



Consider any Council regs or policies relating to sandwich boards

put on sidewalk



NOTE: also applies to alfresco dining

Assignment of the lease



Lor: wants to control quality of Lee (financially viable and responsible)



Lee: may want to sell business and assign L

(retire)
, or prem become unsuitable (outgrow)



If L reg, Lee

has power to assign: s46 RPA



L provisions



o

Usually
assignment/subl
etting/Mging with Lor’s consent

o

BUT some L may have absolute covenant


not allowed at all



If assigned


Lee should ensure Assignee covenants to observe all covenants/conditions of orig L
.



If retail L: Lee MAY give Assignee and Lor disclosure statement: s41 RLA

o

Assures that Lee and Guas will not be liable to pay Lor for any money payable by Assignee to Lor:
s41A(1)

o

But above does not apply if DS contains materially false, misleading or inc
omplete: s41A(2)

Assignment with consent



Assign without conset of Lor or Mg may breach L or Mg.



Retail leases


Lor can only withhold consent in certain circ: s39 RLA

o

Change of use

(proposed assignee has diff use)

o

Proposed assignee’s financial resources in
ferior to present lessees

o

Failure to follow correct procedure



If
NOT
retail lease


consent cannot be unreasonably withheld
:
s133B Conveyancing Act

Subleases



S
ubL (you remain Lee) ends 1 day before end of L




Can be reg
: if so, no need to produce CT or lodg
e L with subL.

Grant/consent:



If L reg, Lee has power to grant subL: s53(1) RPA



Grant of subL without Lor’s consent may be breach of L: s42 RLA, s133B(1) CA



Lor has discretion to refuse consent
: s42(a) RLA



NonRL: consent cannot be unreasonably withheld: s1
33B CA



If Mg, subL without consent of Mgee will usually be breach of Mg

Option:



If subL has option


must ensure option ends BEFORE head lease term + exercise of option is conditional
on head lease existing

Conveyancing aspects:



Differences:

o

Must refer to
head L and consider interaction with head L

o

Inquiries made re headL

o

Need to get head Lor’s consent



Must specify rights/obligations of subLor and subLee re subL prem



Ensure Lee’s obligations under head L are passed onto subLee.



Ensure subLee must follow hea
d L



Extend certain powers of subLor in subL to head Lor (eg. allow head Lor to inspect prop too)

Mtges, Variations



Mg
: Lee may grant Mg of L

as a security

o

If L reg, Lee is proprietor and has power to grant Mg: s56(1) RPA

o

Usually req Lor’s consent


otherwi
se breach of L



RL: consent at Lor’s discretion: s42(a) RLA


7



NonRL: consent cannot be unreasonably withheld: s133B CA

o

If already Mged


need 1
st

Mgee’s consent


otherwise breach of Mg

o

Can be reg



Variation of L
: Lee and Lor can agree to vary L: s55RPA

o

Variat
ion when:



Error/omission in L



Alter a provision eg. limit on user
, removal of fixtures



Record agreed increase/decrease in rent or operating expenses



Increase term or add further options



Cheap way to record exercise of option (rather than prepare/rego new L
) + alterations for
option term

o

If Mg


need Mgee’s consent



otherwise breach of Mg

o

If L reg, L can be varied under: s55A(1) RPA

o

Variation does not bind reg proprietor of prior estate/interest (eg. prior Mg of Lor’s interest or L),
unless prop consented i
n writing before variation reg: s55A(3)

o

Can be reg

Lor
’s outgoings



Significant part of Lee’s payment

+ tends to increase over years



L may req Lee to contribute to all/portion of Lor’s outgoings:



Cl should provide
:

o

What expenses involved?

Standard expenses:



Council and water rates



Land tax
(calc on basis that it is ONLY land owned by Lor: s26 RLA)
and insurance



Security, concierge, caretakers, maintenance staff

o

How much to pay: Lee’s share, calculations, adjustments?



May be % based on area of L prem



May be l
ump sum (rent + outgoings)


but usually separate

o

How to pay
/collect


shortfall, interest, errors

o

Whether Lee has right to audit



Where L isn’t for whole of prop, must consider whether/why contribute to:

o

Structural
repairs to building

o

Repairing inherent d
efects

o

Statutory charges (
for providing
guttering, kerbing

outside prop
)

o

Abating a nuisance (not caused by Lee)


eg. p
est control



If shopping centre, outgoings

o

Exclude advertising, promotion

o

Must be shown as separate amount (not part of outgoings)



Gettin
g instructions:

o

Get comprehensive list of operating expenses that Lee contribute to


even if in the future

o

Specify any items Lee NOT contribute to

o

Decide if Lee pay Lor for GST on operating expenses

o

Sinking fund? Long term maintenance/repair, management
costs, salary of managers, strata levies

User



GEN: Lee may use prem for any purpose they desire


subject to L prov and need to obtain development
consent



Ensure prem are suitable:

o

What existing approvals apply to prem? Conditions of approval?

o

Does Lee’s i
ntended use involve change of user?


8

o

Any development or other approvals req?

o

Whether L should be subject to Lee getting approvals?



L may restrict use though:

o

To conduct particular trades

o

Not to conduct particular trades

o

Limit times of operation

o

Require the
business to be open during certain hours



S61 RLA: if shopping centre, for Lor to change core trading hours of shopping centre


must get consent of retail shops

o

Not to conduct a similar business within a specified distance
:



RLA s59



Cannot stop Lee from ca
rrying on simiilar business outside of shopping centre
during/after L



But with outside business, cannot use shopping centre name or association

o

Building alterations


must be compliant with leg and reg for use

F
actors concerning use



What is Lee’s intended
use?

Legal/physical suitability of prem:

o

Illegal?

o

What existing approvals apply to prem? Conditions of approval?

o

Does Lee’s intended use involve change of user?

o

Any Council development consent or other approvals req?

o

Whether L should be subject to Lee gett
ing approvals?

o

Any building alterations necessary? If so, what, cost, approvals?

o

Prem comply with fire, health, safety regs?

o

Impact of regs on proposed use


pollution, smoke emissions, noise, vibration, cost of complying

o

Factory/shop registration


req fa
cilities or amenities

o

Fitout


installing/removing fixtures



Sufficient to confine use to particular trade, business, profession?

o

Or further limit: particular items or groups of items etc



Should Lee be allowed to change use?

o

Specify additional/alternative u
ses (general terms)?

o

Change subject to Lor’s consent (not refused unreasonably)?

o

Req Lee to be responsible for Lor’s sol’s costs + costs of getting Mg consent?

o

Req Lee to obtain all req approvals?



Specify any additional uses? What if Lee wants to expand/ch
ange use?

o

Lor cannot unreasonably withhold consent



Should access to prem or hours of trade be limited, bcos of:

o

Conditions of approval of use

o

General legislation (re shops/factory leg)

o

Need to close prem at certain times



Should Lee be req to keep prem open

for business during min/max period of days/hours?



Should Lee (or specified person) personally attend prem for min hours each day/wk?

Guarantees



Lor may req Lee to provide Guarantor



Esp where Lee is company


Dirs/Sh are Guas



Guarantee can be prepped as s
e
parate Deed or form part of L

o

I
f so, G
uas should also be parties to L

o

Gtee should be in form of deed or (for TT land) have effect of a deed on rego of L


9



Guarantors:

o

Must execute gtee

o

Must be made aware of meaning/effect of gtee and obligations

o

Must receiv
e independent legal advice, unless Lee and Gua have same interest (eg. Lee is corp
having single Dir/sh who is also Gua)



Trans involving gtees:



If assigned, options etc


Gua execute docs releasing from gtee or confirming gtee to continue



Protection for Gu
a:

o

Lee expressly indemnify Gua

o

Gua to take transfer of L


if Lee in default or repudiated

o

Allow substitute Guas (eg. if a Gua ceases to be Dir of Lee, or L assigned/renewed)

o

Impose obligations on Lor:



Lor take reasonable stpes to enforce L against Lee (b
efore going after Gua)



Lor fwd notices/corro re breaches and arrears to Gua (so Gua fully informed)



Gua be allowed to participate in rent review



Lor not consent to assignment of L without notifying Gua and taking into account Gua’s
views.

Capital gains tax



Granting of L is a disposal of asset (lease) by Lor and acquisition by Lee


CGT applies!


o

s104
-
110
Income Tax Assessment Act (Cth)
: granting L

o

s104
-
115: granting long term L

o

s104
-
120: Lor pays Lee to change L

o

s104
-
125: Lee receives payment for changing L

o

s104
-
130: Lor receives payment for changing L



If Lee assigns, surrenders, expires


disposal


CGT



Consideration: premium (if any) paid for grant of L



NOTE: L is separate asset from land!

o

Thus, even if land exempt from CGT


L is NOT exempt!

GST on commer
cial leases



GST is payable on rent/consideration received by Lor


taxable supply of services: Pt 2
-
2 Subdiv 9
-
A of
A New Tax System (GST) Act 1999



Who pays GST?

o

Negotiated between Lor and Lee

o

ATO makes Lor liable (pay 1/11 of rent)



Lor not entitled to re
cover GST from Lee unless Lee agrees



If so, Lee entitled to input tax credit


Lee has acquired L for a creditable purpose: s11
-
5, 11
-
15, 11
-
20.

Ending the Lease

Surrender



Lee

can surrender L if Lor accepts (agt between Lee and Lor)



If L Mg, surrender with
out Mgee’s consent will usually be breach



If L registered, can surrender:

o

Under s54(1) RP Act
(with consent of Mgee, charge, covenant charge)



Surrender is liable for stamp duty and Lor’s CT must be lodged

o

Implied by granting new L to same Lee

o

By operation
of law


Lor can then apply for record of L to be cancelled



Eg. Lee disappears/abandons prem



Form: Request to Record Surrender of Lease + Stat Dec explaining what happened to L

Termination


10

By expiry
: RG automatically cancels L upon next dealing,
IF
:



L
doe
s NOT contain

option



L contains option for purchase, BUT dealing has evi that

o

option was NOT exercised; or

o

option surrendered or

o

dealing is transfer in favour of Lee



L contains option for renewal, BUT:

o

Dealing has evi that option NOT exercised

o

Option s
urrendered

o

Dealing is L in favour of Lee

o

Option period has expired

By
breach:



Depends on terms of lease, nature of breach and legislation. Eg.

o

Lor can repossess if Lee becomes bankrupt: s201(1) of Bankruptcy Act 1966 (Cth)



Gen:
Lee breach L covenants, esse
ntial terms or repudiate

o

Notice of breach of L cov


in accordance with s129CA



If L reg and Lor repossesses


Lor can apply to remove L from CT: s55 RPA

By notice:



L may allow Lor to terminate by notice if
-

d
estruction of the premises



If Lor has reasonabl
e grounds to suspect prem used for gambling prem


can serve notice to quit under
s42(1) of Unlawful Gambling Act 1998 (NSW)

Disclaimer:

o

If Lor becomes bankrupt or wound up


L continues, but pay to Lor’s liquidator or bankruptcy trustee

o

If Lee becomes ban
krupt:

o

L disclaimed by Lee’s bankruptcy trustee: s133 Bankruptcy Act

o

Lor can (in certain circ) apply for implied surrender to be recorded


but subject to rights of reg
Mgee and subLees: s91 RPA

o

If Lee becomes wound up



o

Lee’s liquidator diclaims L: s568(
1)(a) Corporations Act

o

Lor can apply for recording of L to be cancelled: s46C RPA

Merger:

o

If Lor’s estate and Lee’s interest come into same hands


Lee’s interest extinguished (merged)

o

If L reg, RG records merger: s12(1)(i) by cancelling L.

Dispute resolut
ion



Medication cl (usually commercial L): must do ADR before litigation

o

Cl legally enforceable where sufficient certainty re process + parties’ conduct:
Hooper Bailie
Associated Ltd v Norton Group Pty Ltd
(1992) 28 NSW LR 194

o

Should have:



Require mediation

as condition precedent to litigation/arbitration



Certainty re mediation procedure



Procedure for choosing mediator, costs etc



Pt 7A and 8 RLA: dispute resolution provisions

o

Cannot litigate, unless RLA mediation unsuccessful + Ct finds mediation unlikely to

resolve: s68

o

If dispute/claim in ADT


no Ct will determine, except in limited circ: s76

o

Litigation may (on application by a party) be transferred to ADT: s75

o


o

7A: unconcionable conduct + m/d conduct


compulsory mediation (OFT)


AAT