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 acknowledgement 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 à established form of L?
§ Form:
o Standard form: Law Society (retail and non-retail prem)
o If reg à 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 à ensure in L
o If prohibit competing use by other L à ensure in all other Ls.
Searches
· CT:
o If Mg - need consent + need 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
· Other 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 (“draft L”) – if refers to Memo, include copy
§ Send copy to Lor
§ Send bill to Lor à 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 1st rent à send to Lor
o If security bond à register 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 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 1st rent or security bond (unless org with Lor independently)
§ Receive registered L from Lor à send to client.
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 for L (with L attached)
§ After negotiations + searches à 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 Submit 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 by both parties.
Negotiations for Lee sol:
§ 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 Having 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/knowledge
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 describing 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 advice 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) à 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/connections 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 Bergin (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:
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 personally
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/substantial 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 notice prematurely. During 3-6mths sent reminder letter to Lor (but not proper notice)
- HELD: no option – original letter was given prematurely and 2nd notice not in proper form
Drafting the option clause (in orig L)
· Option cl specifies terms of new L, except:
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 except 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)
§ NOTE: if retail L, s45 restricts expenses payable by Lee
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 specify 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% à 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 tickets 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 à no rent paid
o If diminishment of prem à 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 prov 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 fixtures 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 surveyor + Lor to receive cash payment (rather than work carried out by Lee)
Signs
· Size/nature of signs should be negotiated + agreed.
· 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 –