Understanding a Commercial Lease

Understanding a Commercial Lease

When renting a property from which you intend to run a business, it is important for both Landlords and Tenants to understand the relationship they are entering into and the rights and obligations that they each have. The document that governs this relationship is usually a Commercial Lease.

So, what is a Commercial Lease?

A lease is a legally binding contract that gives you certain rights to a property for a set term. A commercial lease is used when leasing property that is used primarily for a business.

You should never sign a lease without understanding all of its terms and conditions. If you don’t understand what you are agreeing to you could experience serious financial and legal problems.

It’s important to properly investigate the property and lease document before you sign. It is a good idea to ask your lawyer to explain each clause of the lease to you. Your lawyer can give you legal advice, draft new clauses and help you negotiate the terms and conditions to suit you.

Important issues to consider when entering into a lease

A commercial lease will usually contain terms dealing with items such as:

Rent: How much is the rent and when is it due? The amount of the rent will usually be calculated based on the area of the premises. This may not always be as simple as it sounds. For example, if the shape of the property is irregular or the area includes a lift, more than one floor, outdoor area or interior walls.

Rent Increases: Rent will usually increase annually during the term of the lease, with increases determined by a fixed percentage, market based values or tied to the CPI. It is common for CPI or fixed reviews to occur during the term of a lease and for a market review to occur at the expiry of the initial term and each option period.

Security Deposit: The landlord will usually ask for some form of security from the tenant in case the tenant defaults on their obligations (eg. not paying rent). The security is usually for an amount equal to 3-6months’ rent and is by way of bank guarantee or security deposit. If the tenant is a company then personal guarantees from the company’s directors may also be required. The lease should also specify the terms regarding its return.

Term of the lease: The lease should set out the length of the lease and any options to renew the lease and any terms relating to the renewal. A landlord will generally want a longer initial lease term (typically 3, 5 or 10 years) whereas the tenant is likely to want a shorter period (1-3 years).

Option to Renew: An option allows the tenant to continue leasing the property on similar terms at the end of the period of the lease for a further defined period and rent (subject to any review). An option gives the landlord potential greater security of income and the tenant the ability to make longer term plans for their business.

Knowing the procedure for exercising the option, especially when the option can be exercised, is critically important

Improvements: A lease should address what improvements or modifications can be made to the property, who will pay for the improvements and whether the tenant is responsible for returning the property to its original condition at the end of the lease.

Description of the property: The lease should clearly describe all of the property being leased, including bathrooms, common areas, kitchen area and parking spots. A plan of the property should also be included.

Signage: Any restrictions on putting up signs, say that are visible from the street, will be included in the lease. Also, check local zoning regulations to determine what other limitations may apply.

Use of the property: Most leases will include a clause defining what the tenant can do on the property (eg. What type of business). A tenant should ask for a broad usage clause just in case the business expands into other activities. Ask your local council if your business can operate in your desired location. Also consider the council’s development plans for the area.

Outgoings: The lease will set out who is responsible for costs like utilities, property rates & taxes, insurance, and repairs.

Insurance: You should contact your insurance company and discuss the clauses referring to insurance so you fully understand what is covered by the lease.

Exclusivity clause: This is an important clause for retail businesses renting space in a commercial complex. An exclusivity clause will prevent a landlord from renting space to a competitor.

Assignment and subletting: A tenant should maintain the right to assign the lease or sublet the space to another tenant. Usually the tenant is still ultimately responsible for paying the rent if the business fails or relocates, but with an assignment or sublet clause in place, the business can find someone else to cover the rent.

Maintenance & Repair: The lease should clearly set out who is responsible for maintaining or repairing the property and the fixtures and fittings during the term of the lease.

Make Good: A tenant should carefully review the make good obligations in the lease.  Often these can be onerous and involve considerable expense on the tenant having to reinstate the premises to their original condition when the lease commenced.

Termination: The circumstances under which the lease will be terminated should be set out in detail in the lease.

Costs: The landlord may want the tenant to pay the costs of preparing the lease, this should be clearly set out in the lease.

Retail lease or general commercial lease?

The Retail Leases Act 1994 has specific legislation relating to retail leases. This legislation is designed to promote fair leasing arrangements, improve communication and provide access to low cost dispute resolution for the retail industry.

For a new retail lease the landlord is legally required to give the tenant:

  • a written lease with matters agreed to and signed off by both parties.
  • a disclosure statement.
  • the NSW Retail Tenants Guide, which gives notice of some of the tenants’ rights and obligations and some commercial matters that the tenant should be aware of.

The disclosure statement outlines important information about the lease, it must be in the prescribed form and contain a statement notifying the tenant that independent legal advice should be obtained. It would also normally include details about:

  • the term of the lease
  • whether there are options for further terms
  • the occupancy costs for leasing the premises (including rent and any outgoings)
  • specific information for shopping centre leases
  • tenant’s fit out requirements
  • if there are any relocation or demolition clauses

Conclusion

Although many of the terms of a commercial lease are fairly standard it is important that you fully understand your rights and obligations, especially the provisions which relate to retail leasing.

It is a good idea to ask your lawyer to explain what each clause in the lease means and to get their assistance in negotiating the terms and conditions that suit you.

If you or someone you know wants more information or needs help or advice, please contact us on (02) 9963 9800 or via our contact form here.

The financial risk in giving personal guarantees in leases

The financial risk in giving personal guarantees in leases

If you are a director of a company entering a commercial or retail lease, a landlord will likely require you to give a personal guarantee for the company’s obligations under the lease. In such cases, directors should fully comprehend the extent of the guarantee they are providing and obtain appropriate legal advice to minimise financial exposure.

There are two court cases that are dire reminders of the risk that a director takes when guaranteeing the performance of a company’s obligations.

In Lin v Solomon [2017] NSWCA 328 the landlords were entitled to recover personally from the guarantor, after the lessee company defaulted under the lease. The landlords, who owned the CircaRetail Shopping Centre at Bella Vista, were awarded damages comprising unpaid rent, outgoings, contributions to the retail centre’s promotional levy and GST.

The guarantor claimed that he was ‘induced to enter into the guarantee of the lease by misleading and deceptive representations’ made by the leasing agent. The alleged misrepresentations were that the leased premises, comprising a newsagency, would soon attract increased foot traffic due to the predicted employment of some 1,500 people at a nearby site.

The Court found the misrepresentations as pleaded were not established and, in any event, there would have been no reliance on such representations as the guarantor was an experienced newsagent. In fact, apart from paying a deposit and providing a bank guarantee, the lessee company failed to make any lease payments or outgoings under the five-year lease which commenced in May 2009 and was terminated by re-entry by the lessors in December 2012.

The primary decision was upheld on appeal and the guarantor was ordered to pay the respondents the sum of $602,178.35 plus interest and costs

Incidental to the issue of the misrepresentation, but significant to the appeal, was the appellant’s allegations that the primary judge had not been impartial and should be recused from the case. The appellant was also unsuccessful on this point.

In NB2 Pty Ltd v P.T. Ltd [2018] NSWCA 10 the lessee / appellant challenged the primary judge’s decision to award payment of damages to the landlord / respondent after the lessee company breached the lease.

The lessee had entered a ten-year lease for a fruit and vegetable shop at Westfield Shopping Centre, Miranda. After defaulting in paying rent, the lease was terminated by the landlord which then sued the lessee company and the guarantors under the lease.

In the primary hearing, the appellant claimed that it had been misled by the landlord during negotiations after expiry of its previous lease, when it promised the lessee exclusivity as the ‘sole independent speciality fruit and vegetable retailer’ within a defined area at the centre. Subsequently, nearby Franklins re-opened its refurbished premises selling fresh fruit and vegetables, which detrimentally affected the lessee’s turnover.

The alleged misrepresentations were not made out. The Court considered that the expression ‘sole independent fruit and vegetable retailer’ did not constitute retailers such as Franklins as it was not a ‘specialty retailer’.

The primary judge entered judgment in favour of the landlords for $3,537,040.50 against the two directors of the lessee company. This was upheld on appeal and the appellants were ordered to pay the respondent’s costs.

Joint and several liability

As many companies have more than one director, both or all directors are usually required to guarantee the company’s performance of a contract with a third party. In such cases, it is important to understand that the third party will be able to call upon either one or all of the joint guarantors for the outstanding liabilities of the company.

The third party need not exhaust all options to recover the debt against the company and will usually pursue the director/s in the most favourable financial position.

Directors who give guarantees should seek legal advice regarding appropriate asset management to safeguard personal assets.

Conclusion

A guarantor is at considerable risk of personal exposure if the company is unable to meet its responsibilities under a contract, and in such cases may face financial disaster.

Personal guarantees for lessee companies can seldom be avoided. However, the risk for guarantors may be minimised by paying a higher bond or arranging a bank guarantee in exchange for limiting the guarantor’s financial exposure.

Companies and their directors are advised to obtain legal assistance before entering a leasing arrangement and independent advice regarding the extent of their personal obligations under a guarantee arrangement.

It’s easy to let the prospect of a new venture curtail a comprehensive review of the terms of a lease, however these cases provide thoughtful insight into the importance of treading carefully when it comes to guarantees.

If you or someone you know wants more information or needs help or advice, please contact us on (02) 9963 9800 or via our contact form here.

The Pitfalls of Release of Deposit Clauses

The Pitfalls of Release of Deposit Clauses

The usual procedure in contracts for sale of land

The usual procedure on the exchange of Contracts for a property, the Purchaser gives to the Vendor’s agent the cheque for the deposit. The deposit is consideration given by the Purchaser to the Vendor and it is what makes the contract valid. The amount can vary, but is usually 10% of the purchase price. This is usually held in the trust account of the Vendor’s selling agent, or in some cases by the Vendor’s solicitor. On settlement, the Purchaser’s Solicitor sends an order to the selling agent (via the Vendor’s solicitor) to authorising the release of the deposit to the vendor. The selling agents will deduct their commission from the deposit and the balance is released to the vendor.

Release of Deposit Clauses

A release of deposit clause is sometimes requested before the contracts exchange. This clause allows for the Vendor to have access to the deposit funds before completion. This is usually requested because the Vendor wants access to the funds to use in their own property purchase. The funds can be used to either pay for stamp duty or to pay for the deposit on a property the Vendor is purchasing. The funds may also be requested if the Vendor needs it released simultaneously with settlement because the mortgage balance on discharge is higher than the balance payable on settlement. On some occasions, the estate agent will ask the Vendor to request it, so they are able to get their commission quickly.

The release of deposit clauses are heavily cautioned by the Law Society. The reason why the release of deposit clause is discouraged is because it can become difficult to recover if the Contract falls over because of the actions of the Vendor. The recovery can have significant legal costs involved. Some of the situations which can occur where it may be difficult to recover the deposit are if the Vendor dies, or they go bankrupt, or an order affecting the Vendor due to a Family Court order.

It is important to seek the advice of a solicitor about these issues if you are going to purchase a property. If you would like more information on how we can assist you with your matter, do not hesitate to contact us on 9963 9800 or at law@etheringtons.com.au.

The Hidden Costs of Buying a House

The Hidden Costs of Buying a House

Avoiding the Hidden Costs of Buying a House

Buying a property in Sydney is expensive enough as it is. Don’t leave yourself open to the hidden costs of buying a house. Here are 5 issues you should consider before purchasing a property, to avoid unexpected costs.

1. Capital Gains Tax

If you are purchasing an investment property, you should always be mindful of being liable for Capital Gains Tax (CGT). CGT applies when you sell your property, if you’ve rented it out.

If you rent out a property for a few years to help with the mortgage and then decide to move into the property, you should only be liable for CGT for the time the property was rented out. There is a CGT discount method, which means that by living in a property for 12 months, you can reduce your capital gains liability by 50%.

2. Stamp Duty

Stamp duty is a levy charged on the transfer of land in New South Wales. It needs to be paid before the completion of the contract can occur. The amount is based on the purchase price of the property, and payable within three months of the contract date (the date of exchange). There is an exception for off-the-plan properties, whereby it can be delayed by twelve months.

Stamp duty can be a large sum and it is important that you factor in this amount when purchasing a property.

3. Organising Your Finance

Once you have exchanged contracts (both you and the seller have signed) you will be bound to complete the contract on or before settlement. A trap that home buyers occasionally fall into, is not having their finances prepared. You should liaise with your broker or receive some form of pre-approval from your financier before you purchase a property.

If the preparation of the financial approval and the signing of the loan documents is left to the last minute, it can delay settlement. If you delay settlement you will become liable to penalty interest on the balance of the purchase price.

The seller may also be able to rescind the contract, meaning you will lose the property and your deposit. It is therefore vital that you ask your solicitor to liaise with their broker or financier to ensure that the finance will be ready in time for settlement.

4. Pest & Building Report

An informed purchaser is a good purchaser, which is why it is important to obtain a pest & building report from a reputable company. A pest & building report will show the ‘real’ property you are buying.

The report lists the issues and damage that is found on the property and the cost in repairing it. This is important for a purchaser as it will show the additional cost behind the purchase of the property, as it may detail pipes and cracked tiles that will need to be repaired, and if there are any leakages or dampness around the property. It will also show if there is any evidence of termite or other insect damage to the property.

For example, a woman in Victoria recently purchased a property without obtaining a pest & building report. Her house sat on top of a double garage. The woman had never entered the garage until she had purchased the property. As soon as she walked inside the garage, she thought her house was falling down. The back wall was so concave, the woman could put her hand in the cracks. The costs of fixing this was up to $50,000.

If she had obtained a pest & building report, she would have established the position with the back wall. As a result she may not have purchased the property.

5. Survey Report

A survey report is useful for houses or vacant land. It shows the boundary of the property, so you know if the neighbours fencing or structures encroach onto your property or vice versa. This can also be useful for a purchaser that will be building a structure on the property and will require council approval, as this is one of the important documents the council will need.

Consulting a Solicitor

These are some of the issues that can befall home buyers. It is important that a prospective purchaser speak to a solicitor who knows the process and can help the purchaser navigate these issues. To discuss your property matter, please contact Etheringtons Solicitors on 9963 9800 or via our contact form.

Demystifying Company Title

Demystifying Company Title

Strata title is a more recent phenomenon, with legislation made in 1961 setting out strata title. Strata title now covers nearly all apartment blocks and unit properties. Prior to 1961, there was no strata title, and all these types of property were covered by company title. This is less common today and most units have converted to strata title (though it still exists in certain places). Prospective purchasers often have an aversion to company title properties and steer clear of them, due to things they hear through the grapevine. In reality, it is just another form of property title, alongside the widespread torrens title and strata title properties, although it has unique features.

What is Company Title?

Company title emerges when a company owns a unit complex. The ownership of the individual units in the complex is granted by the purchase of shares in the company that owns the complex. An example would be a company that owns a unit complex that has four individual apartments. There are forty shares in the company and each owner purchases ten shares. Each owner purchasing ten shares is entitled to the use and enjoyment (but not ownership) of an apartment in the complex. It is important to re-emphasise here that the owner of the unit does not enjoy title that he/she would normally enjoy if it was a strata unit. Instead, they own a portion of the shares in the company and this allows them to use the property. The company itself has the title.

Advantages

  • An advantage of company title is that it is valued less than an equivalent strata unit. This is because there is reduced administration fees and the nature of the title brings the value of the property down.
  • There may be long term advantages with company title property, as it may be converted into strata title and increase the value of the property.
  • The possible restrictions on the use of the property may suit some purchasers. For example in some company title properties, onerous rules could be imposed on shareholders to regulate security of the building matters.

Disadvantages

  • A disadvantage of company title is the possible restrictions on the use of the unit or apartment being purchased. As a company owns the complex, it is governed by a constitution or articles of association. This is unlike strata title, which is governed by legislation and by-laws. This means that it can be more restrictive and can limit what a potential purchaser can do. For example, they can restrict people leasing out the unit, or they can have a mortgage over the shares. It is important for a prospective purchaser to review a company title constitution with a solicitor, so they are aware of what these restrictions will be.
  • Another disadvantage is the approval process that may be required to purchase the shares of the company. When purchasing a unit in company title, it is subjected to the approval of the Board of Directors. This means that while a prospective purchaser may have all the capital required to purchase a unit, it does not mean they will be able to purchase it. The approval process from the Board of Directors changes from company to company, and it is crucial for a purchaser to discuss this process with their solicitor, who will be able to advise the prospective purchaser of the requirements.

As seen above, people should not be turned off by a company title property. It is simply another form of property title with its own unique features. A potential purchaser should discuss with a solicitor whether this type of property is right for them. If you would like more information on how we can assist you with your matter, do not hesitate to contact us on 9963 9800 or via our contact page.

Security for Leases – 3 Most Common Forms

Security for Leases – 3 Most Common Forms

Security for Leases – what is a Security?

Landlords ask for security for leases, which you’ll have to pay when entering a lease. The security is an amount – usually 4 or more weeks’ rent – to cover any extra expenses should you break the terms of the lease agreement. For example, if the property is unreasonably dirty when you leave, cleaning may be paid for with the security. If you haven’t breached the lease agreement, your landlord will return the security amount to you at the end of the lease.

There are a few options that you can consider to provide a security. Your landlord might only accept certain types of security based on the type of lease and the amount. Check with them when making your decision.

The three most common forms of security are:

Security Deposit

A security deposit, or cash bond, is an amount that is paid directly. It is paid to your landlord or managing agent when you enter into a lease.

If your lease is a commercial lease, you can pay the security directly to your landlord or managing agent. They will hold it for the term of the lease. The exception is if your lease is a retail lease (a type of commercial lease used if you have a shop front). If your lease is a retail lease, your security must be provided to the NSW Retail Bond Scheme. They will hold it during the term of the lease. Your landlord will require your signature to claim the security held, should you break the terms of the lease.

Bank Guarantee

A Bank Guarantee is an unconditional undertaking provided by a bank to your landlord to guarantee payment of an amount if required. In effect, the bank will pay the security amount to the landlord on your behalf if you either break the terms of the lease or have outstanding rent due.

The bank will usually secure this amount by:

  • Cash deposit by yourself (if you are an existing customer); or
  • Drawing on an existing security (such as the equity in a mortgage).

This can make it attractive to some tenants, as it doesn’t tie up cash in a security deposit.

Third Party Guarantee

A third party can guarantee payment under a lease. Your landlord would be able to recover any monies due to a breach of the lease from the third party. If the tenant is your company, the landlord may require the directors to guarantee the lease. If you are an individual tenant, a third party guarantee might not be accepted by your landlord as a form of security, as it can be costly to enforce payment if required.

Seek Legal Advice

It is important to seek legal advice before entering into a lease to determine which type of security is in your best interests. Therefore please get in touch if you have any questions about security for leases, or other property law matters.