Lessors and lessees of commercial, retail and industrial premises should understand their rights and responsibilities under a leasing arrangement and the relevant laws that apply to certain types of leases.
All lease agreements should be in writing. The following terms are essential to all leases and should be carefully reviewed to ensure they reflect the parties’ negotiations and commercial needs.
Description – the legal title of the property must be included and the shop or unit number, building names and street address for the premises. Where the area forms part of a larger space, a floor plan with measurements and the leased premises clearly marked should be included. Use of car spaces, storage facilities and common areas or amenities to be shared with other tenants should also be shown.
Term – the lease term should reflect the lessee’s operational plans for the business, for example, if the premises will be used to run a franchise, the franchise agreement and renewal options should coincide. Lessees should carefully note the period within which notice must be given for any options to renew the lease.
Lessors should review lease terms in light of their investment strategy, loan commitments and any plans to sell the property in the future. The marketability of a property may be affected by its current lease status. Rent renewal and termination dates should be diarised to plan marketing activities to avoid lengthy vacancy periods.
Permitted use – the lease must state the permitted use of the premises, noting it is the lessee’s responsibility to ensure the proposed use complies with any Council or other requirements.
Outgoings – the parties should be clear about who must pay for what and in what proportions. Outgoings include utility services, repairs and maintenance, rates and taxes, cleaning and security. In retail leases, recovery of certain outgoings may be prohibited or limited.
Rent and rent reviews – the obligation to pay rent is an essential term of the lease. A lessee’s financial plans should include rent for the entire term and any increases pursuant to a rent review. Rent review methods are usually by increases in the Consumer Price Index, market review or a set percentage on each anniversary of the lease.
Most lessors will require lessees to pay rent in advance and provide a security bond or bank guarantee to ensure compliance with their obligations under the lease.
Fitout and refurbishment – negotiations involving fitting out of the premises should be clearly stated including the types of fixtures and fittings to be installed, who is responsible to carry out and pay for the work, approvals, whether a rent-free period is allowed while work is carried out, and the lessee’s obligation to refurbish or restore the premises at the end of the lease.
Assignment clauses – allow a lessee to assign the lease with the lessor’s consent. These are desirable for a lessee, particularly if starting a new business where prospects of success are unknown. From a lessor’s perspective such clauses should allow for discretion to determine the financial viability of a proposed incoming lessee and allow reasonable assignment costs.
Retail leases are governed by the Retail Shop Leases Act 1994 (Qld) which aims to enhance consumer protection for lessees. It sets out minimum terms for lease agreements and promotes transparency and fairness in the retail leasing industry.
Generally, and subject to some exclusions, the Act applies to premises located in a retail shopping centre and / or premises that are used wholly or predominantly for conducting a retail business.
Lessors must provide prospective lessees or lessees exercising an option to renew a lease, a disclosure statement. In addition to the essential terms outlined above, a disclosure statement must include (where relevant) details of a tenant’s estimated liability for outgoings, relocation or demolition clauses, planned future works and information specific to shopping centres such as trading hours, annual sales for the centre, turnover for speciality shops per square metre, traffic count, and lease termination dates for anchor tenants.
Failure to provide a disclosure statement or providing a defective disclosure statement may be grounds for a lessee to terminate a lease.
Leasing disputes often arise because the parties are unaware of their rights and responsibilities under a lease agreement, or a written lease is non-existent, incomplete or ambiguous. Investing time and effort to have a lease professionally prepared and reviewed before allowing or taking possession of premises can minimise potential disputes, business interruption and financial loss.