What you need to know as a Landlord
Retail or Non-Retail
A most important preliminary consideration in granting a Lease is whether or not the Lease will be subject to the Retail Leases Act 2003 (‘the Act’) as a retail Lease. Being subject to the Act gives you more obligations and grants the Tenant greater protections.
Be aware that whilst some retail uses are obvious (eg. a retail shop, a cafe, a gym, etc.) others are less obvious (eg. an accountant or lawyer’s office, a function centre, cold storage facility, etc.) and detailed inclusions and exclusions in legislation, ministerial determination and common law apply.
It is, of course, advantageous for a Landlord to grant a Lease on a non-retail basis.
However, whether the lease is retail or not is a matter of law and not an agreement between the parties, accordingly a wrong choice at the outset may later entitle a Tenant to clawback payments or assert rights in the future if you have classified them as non-retail, but they are in fact retail.
The Power of the Lease
As Landlord, you have the power and right to draft the Lease to be presented and negotiated with the Tenant.
Standard form leases issued by the Law Institute of Victoria or the Real Estate Institute of Victoria are commonly used, but likewise a unique form of Lease can be drawn.
The key issue in the form of Lease used is to balance protections for you and your investment in the Premises (in terms of the general conditions in the lease and any additional special conditions to be incorporated) and the ease with which the terms can be negotiated with the Tenant.
A balance of interests need to be reached. You should ensure that the whole life cycle of the Lease is properly addressed, beyond initial considerations of fitout, lease incentives and immediate tenancy risks.
Your Leasing/Managing Agent
If you are not directly managing your Premises, a leasing or managing agent is an essential part of your team in managing the Premises and your relationship with your Tenant.
You should ensure that your Authority granted to your agent is suitable with the extent of control you require (beyond the cost of retaining the agent).
Further, your lawyer should also have a good working relationship with your Agent as any legal dealings with the Premises impact its day to day management and vice versa.
Beyond collecting rent and communicating issues from a Tenant, your managing agent is a key contact point to ensure that your Premises are managed smoothly and that you are aware of any legal or other issues on the Premises or with leasing in general which may then require legal advice.
Your Lease Obligations
You should understand the extent and limits of your obligations to maintain the structure of Premises (including capital expenditures).
These obligations are at a higher level when dealing with retail premises as there are bars to certain items being claimed from Tenants (eg. land tax, sinking funds, any undisclosed outgoings, etc).
Any failure to comply with your obligations, especially with respect to the structure of the Premises, could result in the Tenant having a claim against you for any loss or business or damage they suffer as a result of any structural issue or leak in the building. Further, Essential Safety Measures in buildings (ie. fire protection) are likely to be considered solely Landlord’s obligations.
Lease Incentives
It is common for Tenant’s to seek lease incentives when entering into a Lease, this can take the form of a rent free period; a rent and outgoings free fitout license period; a fitout contribution; a rent rebate; etc.
You should ensure that any incentive granted is granted for a limited period and on specific terms that limit your risk.
Where possible benefits should not be paid or given up front, but rather upon some performance by the Tenant of its obligations to show you that they will be a good Tenant (eg. Payment of fitout contributions only upon the completion of all works; or splitting a rent free period so that it applies over the years of the Lease rather than as single up front period). Note also that any incentive granted can have an impact on the value of the Premises given it alters the effective rent/return on the Premises.
Insurance
When obtaining your building insurance cover, you should ensure that your insurer is aware of the Tenant’s actual use of the Premises and, if there is a change in Tenant, then any change in use of the Premises.
Any failure to notify of the use of the Premises can be grounds for an insurer to refuse a claim if anything happens to the building.
Further, you should also always ensure that the building insurance is under your name and control (and not held by the Tenant as they could cancel or vary the policy without your knowledge).
The Tenant can always reimburse the insurance cost to you pursuant to the Lease.
Security Deposit
Where possible, you should ensure that your security deposit is adequate for the cost of make good in the event that the Tenant abandons the Premises.
Ideally, the security deposit should be paid by Bank Guarantee as this greater security to a Landlord in comparison with cash.
If a security deposit is paid by cash, then it must go into an interest bearing account (either Trust Account or joint account) and the Landlord will need to register a security interest over those funds on the Personal Property Securities Register.
Note that without registration the Landlord does not have a priority right over the security funds (in priority of other creditors) in the event of the Tenant’s insolvency. For further information on security deposits and the Act, visit the Victorian Small Business Commission.
Options for Renewal
If you have granted the Tenant option terms, then be aware that these are the Tenant’s rights and that they may exercise them at their discretion within the timeframe you have agreed in the Lease.
If you have a retail lease, then you are required to give the Tenant at least 6 months’ notice to remind the Tenant of the last date it has to exercise its option (a failure to remind the Tenant extends the date the Tenant has to exercise the option to the date 6 months’ after it receives the notice and if this is after the end of the Lease, then the Lease is deemed extended to that date).
On the Tenant exercising its option, it is entitled to a further term on the same terms as the current lease (usually done by Deed of Renewal of Lease) save for the changed dates and any agreed rent review. If a Tenant fails to exercise its option in time, however, then you have no legal obligation to grant it a further term or, if you wish to grant a further term, then you can negotiate a new Lease.
Assignment of Lease
If a Tenant sells its business or otherwise proposes to assign the Lease to a third party, they will need to obtain your consent. If the Premises is a retail premises, you will not be able to unreasonably withhold your consent.
The Tenant needs to provide you with sufficient information about the proposed new Tenant to enable you to assess whether they are a comparative risk to the existing Tenant from your perspective.
This information would usually include 2 business references (eg. past Landlord or supplier); 2 financial references (eg. accountant, banker) and a Statement of Assets and Liabilities (ideally certified by an accountant).
A company search for a corporate Tenant would be prudent and you may wish to consider whether you need a credit search of a search of any tenancy databases. Any intention to change the permitted use of the Premises may be proper grounds to refuse consent, subject to the terms of the Lease. If you are going to refuse consent, then you will need to ensure that you have safe ground to do so otherwise the Tenant may seek to take legal action against you.
Make Good
Ideally, you should have a detailed condition report which records the condition of the Premises at the commencement date of the Lease.
This report would then set the benchmark for what the Tenant will need to do to ‘make good’ the Premises as a Tenant’s obligation is to return the Premises to you in the same condition it was in on the commencement date (fair wear and tear exempted). To avoid any doubt on works to be done, the Lease should be clear if you expect repainting or recarpeting and you should add detail to terms such as ‘refurbishment’.
The greater detail and thought at the outset on this in the Lease, the less likely it is that there will be a dispute on make good at the end of the Lease.
What you need to know as a Tenant
Retail or Non-Retail
A key consideration in entering into a Lease is whether or not the Lease will be subject to the Retail Leases Act 2003 (‘the Act’) as a retail Lease.
Being subject to the Act gives a Landlord more obligations and grants you greater protections. Be aware that whilst some retail uses are obvious (eg. a retail shop, a cafe, a gym, etc.) others are less obvious (eg. an accountant or lawyer’s office, a function centre, cold storage facility, etc.) and detailed inclusions and exclusions in legislation, ministerial determination and common law apply. Whether a Lease is retail or not is a matter of law and not an agreement between the parties, so it is important at the outset to have a clear understanding of your rights, as a wrong choice may cost you during the Lease and lead to further dispute.
Practically, it is, of course, more advantageous for a Tenant to be subject to the Act in a retail lease.
The Lease
The Landlord will usually present you with their preferred form of Lease.
The Lease should contain all the points of agreement between the parties, including any representations you have relied on in entering into the Lease.
The Lease can prescriptively detail your relationship with the Landlord beyond the payment of rent and you need to ensure that you have a thorough understanding of its terms and your obligations. In receiving advice on and negotiating the terms of the Lease, you should ensure that you are aware of any rights you may be entitled to pursuant to the Retail Leases Act 2003 and you should view the Lease in terms of its full operational life (from fitout through to trading from the Premises and then to your exiting the Premises and making good).
The Landlord or Managing Agent Relationship
Beyond the terms of the Lease, you should be in effective communication with either the Landlord directly (if they manage the Premises directly) or with their managing agent. Ensuring that there is full and clear communication can often stop disputes from arising and save you in the long term.
Permitted Use
In entering into a Lease, you should ensure that your permitted use is as wide as possible to give you the greatest flexibility in your operations from the Premises, but also to make it easier for you to assign the Lease (noting that a change of use is valid ground for a Landlord to refuse consent to an assignment of the Lease).
Lease Incentives
It is common for Landlord’s to offer lease incentives when entering into a Lease (if not offered these should be sought especially if you are looking to secure a long term lease), these can take the form of a rent free period; a rent and outgoings free fitout license period; a fitout contribution; a rent rebate; etc.
Any incentive should be granted on an unconditional basis (as far as possible), with no claw back provision for the Landlord (noting that claw back provisions can be subject to legal challenge). Where possible benefits should be paid or given up front, so as to support your business as it establishes itself.
Noting, however, that a payment over time may well be a mechanism for you to obtain a greater incentive (in terms of amount) as you will be able to show the Landlord that you will be a good Tenant (eg. splitting a rent free period so that it applies over the years of the Lease rather than as a single up front period).
Outgoings
Beyond the list of outgoings payable in the Lease, you should ensure that you are aware of your rights in the Retail Leases Act 2003, for example, the Landlord is not allowed to seek reimbursement for land tax or for costs in preparing the Lease, nor do you need to contribute for undisclosed outgoings. If you are a retail tenant, ensure that you receive a Disclosure Statement and are satisfied with its contents.
Maintenance and Repair
For a non-retail tenant, the Landlord can (subject to commercial negotiations) essentially pass on all obligations to a Tenant. However, for a retail tenant, you should be aware of the protections you are entitled to rely on in terms of the Landlord’s capital obligations, including the fact that the Landlord is obliged to maintain the structure, fixtures and its plant and equipment in a condition consistent with the condition on entry into the Lease (save for circumstances of Tenant misuse or where the Tenant can retain the item at the end of the Lease).
Mortgagee Consent
When leasing, it is important to ensure that you obtain mortgagee (being the Landlord’s lending bank) consent to your Lease, as without this the mortgagee is able to disregard your Lease and force you out of the Premises should it ever take possession of the Premises due to any financial difficulties of the Landlord. Doing this addresses a risk which is outside of your control.
Options for Renewal
The options contained in a Lease are a Tenant’s rights and valuable to a Tenant both for certainty of tenure for its business, but also in terms of any sale of the Tenant’s business. It is crucial to ensure that you exercise your option within the timeframe specified in the Lease. Any failure to exercise the option will mean that the Landlord will have no legal obligation to grant you the option term or the Landlord may well seek to grant you the further term on terms which are less favourable than your existing terms. If you have a retail lease, the Landlord is obliged to give you a 6 months’ written notice reminding you of the last date on which you may exercise your option. If the Landlord fails to give you such a notice, then the last date to exercise your option is deemed extended to the date 6 months after the Landlord provides you with a notice and, if this date is after the end of the term, then the Lease shall be deemed extended to the date 6 months after the Landlord’s notice. Note that, for a retail lease, if you have no option terms remaining the Landlord is still obliged to give you a 6 months’ written notice either offering a further term and the conditions for that further term (this offer to remain open for 60 days) or confirming that the Landlord will not grant a further term.
Assignment of Lease
If you sell your business or otherwise propose to assign the Lease to a third party, then you will need to obtain Landlord consent.
If the Premises is a retail premises, the Landlord will not be able to unreasonably withhold its consent. You will, however, need to provide the Landlord with sufficient information about the proposed new Tenant to enable the Landlord to assess whether the new Tenant is a comparative risk to you as the existing Tenant.
This information would usually include 2 business references (eg. past Landlord or supplier); 2 financial references (eg. accountant, banker) and a Statement of Assets and Liabilities (ideally certified by an accountant).
Note that if the Landlord refuses consent unreasonably, then you may well have legal rights to take action against the Landlord. Practically, you should also, however, consider with the new Tenant what options you may have available to commercially negotiate with the Landlord in terms of greater security to address any risk profile difference between you and the new Tenant.
Make Good
At the start of any Lease, you should either ensure that you have a detailed condition report which records the condition of the Premises at the commencement date of the Lease or otherwise make a detailed record yourself of the Premises.
This report or record would then set the benchmark for what the you will need to do to ‘make good’ the Premises as usually a Tenant’s obligation is to return the Premises to the Landlord in the same condition it was in on the commencement date (fair wear and tear exempted). Note that some Leases can require you to return the Premises back to a “base” or otherwise back to a bare shell.
These type of provisions would substantially increase your costs on exit to a Premises and should be negotiated where possible. To avoid any doubt on works to be done, the Lease should be clear as to repainting or recarpeting or patching and it should detail terms such as ‘refurbishment’.
The greater detail and thought at the outset on this in the Lease, the less likely it is that there will be a dispute on make good at the end of the Lease.
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