Do you own commercial premises which you lease out or have you recently purchased commercial premises with the intention of leasing them out? If so, here are the main issues you need to consider with respect to your obligations as a lessor of commercial premises in South Australia.
Each State and territory has its own legislation governing retail and commercial leases. In South Australia, the Retail and Commercial Leases Act 1995 (SA) (“Act”) regulates commercial leases where the rent payable under the lease does not exceed the statutory threshold of $400,000.00 per annum. For commercial leases where the rent payable is above the statutory threshold the parties are free to negotiate without having regard to the Act.
Before offering premises for Lease
Before the lessor or its agent is able to offer premises for lease, the lessor or its agent must have a copy of the proposed lease available for inspection by a prospective lessee. The proposed lease must be in written form but is not required to include particulars such as the rent or the term of the lease.
In addition to having a proposed lease document available for inspection, the lessor is also required to give the proposed lessee a ‘Disclosure Document’. The Disclosure Document is a written document stating the general terms of the lease, including:
- the address of the leased premises;
- the total lettable area of the leased premises;
- areas that are common areas (in the case of multiple tenanted buildings);
- the permitted use of the leased premises;
- the hours during which the lessee will have access to the leased premises;
- the term of the lease and the date on which the leased premises will be available for occupation;
- the amount of the rent payable by the lessee, including rent reviews and the mechanism for review;
- each outgoing and an estimate of the lessee’s annual liability with respect to the payment of the outgoings;
- the right to renew or extend the term of the lease;
- the legal consequences of a breach of a term of the lease;
- if the leased premises are situated in a retail shopping centre then the Disclosure Statement must also include the number of shops in the retail shopping centre, the number of parking spaces available for the customers, the lessee and the lessee’s employees, the core trading hours and the tenant mix.
- Any other monetary obligations such as insurance requirements, registration fees, GST, bank guarantees and the lessee’s liability on the cost of the preparation of the lease and Disclosure Statement.
If a Disclosure Statement is not given or contains information that is false or misleading, the lessee may apply to the Court and depending on the circumstances of the case, the Court may make the following orders:
- An order avoiding the lease in whole or part;
- An order varying the lease; or
- An order requiring the lessor to repay money paid by the lessee or pay compensation to the lessee.
Cost of Lease Preparation
The Act allows the lessor to charge the lessee one half of the costs of the preparation of the lease and the full cost of any fee charged by a mortgagee for consenting to the lease and producing the certificate of title for the purposes of the lease being registered at the Lands Titles Office.
Minimum 5 year term
Unless one of the exceptions contemplated by section 20B(3) of the Act is relied upon, one of the fundamental legal effects of the Act that applies to a lease relates to the length and security of tenure. Despite any clauses in the lease, the Act states that the term must be at least 5 years. The term is worked out on the assumption that any right of renewal or extension under the lease will be exercised by the lessee. For example, if a lease is entered into for a term of 2 years (without there being any mention of a right to renew), the Act provides that its term is automatically extended by 3 years. When negotiating your lease, ensure that you are aware of the minimum 5 year term and the decide whether you wish to offer a lease for a full 5 years or whether you are prepared to offer an initial term of less than 5 years with the option to extend the initial term to a full 5 years or more.
There are a number of exceptions to the 5 year term. Section 20B(3) of the Act provides them in detail. The one exception that is often used by parties to the lease as a means of escaping the 5 year term is the ‘certified exclusionary clause’ rule which is set out in section 20B(3)(c). Basically under this rule, the parties are not bound by the 5 year term if the lease contains a ‘certified exclusionary clause’. As the lessor, if for some reason you are not prepared to offer a full 5 years, then it is prudent to include the certified exclusionary clause to ensure that you are not bound by the 5 year term. The certification requires the lessee to receive advice from a lawyer (who is not acting for the lessor) and for that lawyer to explain the effect of the ‘certified exclusionary clause’ and the lessee giving the lawyer assurance that the lessee was not acting under coercion in consenting to the inclusion of the ‘certified exclusionary clause’.
Some things to consider
Are your premises competitive with the market?
Prior to commencing your negotiations with a prospective lessee or prior to placing the premises on the market, assess the premises both internally and externally. Is it A,B, C or D Grade premises? What market are you trying to appeal to and what (if any) is the cost required to take appropriate measures to ensure that your premises are competitive within the market? What is the rent and (possibly) incentives you’re willing to offer to prospective lessees? Are they competitive? Do some research or seek the advice of a commercial leasing agent.
In your negotiations with a proposed lessee, a good starting point is to discuss and reach agreement on the following:
- The term of the lease and options to renew.
- The base rent and review mechanisms. Rent is usually increased each year of the term based on either a fixed percentage increase or an increase based on the Consumer Price Index. Most leases will provide for a market rent increase on the term being renewed.
- The permitted use of the premises.
- The rights and responsibilities of the lessor and lessee.
- The outgoings payable by the lessee – government rates and taxes, insurance, cleaning, gardening, utilities such as electricity and gas consumption, after hours heating and cooling for the premises (if the premises are multi- level where a centralised system operates for the entire building), security, strata and/or community management fees; and other services consumed from the premises.
- Car parking space and cost.
- Lease incentives.
- Special Conditions. These may include who is to bear the cost of any refurbishment or fit out of the premises prior to occupation, and who will then own the fixtures and fittings.
Repairs and maintenance
As a general rule, the lease should contain provisions that require the lessee to bear the cost and expense for general repairs and maintenance. The lease should include a provision where the lessee is required to re-paint the premises (with the approved paint colours) at least once every 5 years and/or at least once prior to the immediate termination of the lease. This will ensure that the premises remain respectable in appearance, both during the term of the lease and at the expiration. Note though, the Act prevents the lessor from passing on to the lessee any obligations in respect of maintenance and repair of a structural and capital nature.
List the outgoings
Be clear about the list of outgoings which you intend to pass onto the lessee for payment. Typical outgoings include council and water rates, building insurance, public risk insurance, plate glass insurance. (Land Tax however is not recoverable from the lessee under the Act.) Other costs that you may consider passing on are management fees, cleaning of common areas, consumption of electricity and gas and any other reasonable costs and expenses in maintaining the premises (for example maintenance, upgrades and supply of Fire Safety Equipment, and heating/cooling systems and any costs associated with the upgrading of the building to comply with changes to Environmental or Building Regulations, Disability Access requirements and Safety requirements).
If the proposed lessee is a company, ensure that you obtain directors guarantees to enable you to look to the directors personally for recovering unpaid rent and outgoings if the lessee company fails to comply with its obligations under the lease.
Will parking space be included as part of the lease or will car parking form part of a separate licence agreement? This will depend on whether the parking bays are owned by you or not.
Are the premises licensed for consumption of liquor and/or operation of gaming machines? If they are, and the liquor and/or gaming licence is granted to the lessee with respect to the premises, the lease should contain a provision that requires the lessee to maintain all relevant licences necessary to carry on its business. Following the expiration of the lease the lessee should be required to transfer the liquor and/or gaming licence to the lessor. This will ensure that the licence continues to ‘attach’ to the premises. The idea behind this is to keep the premises licensed (after the lessee has vacated) which will increase the premises appeal in the market place and potentially reduce the lead time for a new tenant to operate under a liquor and/or gaming license.
If you have passed on the obligation of building insurance to the lessee, then ensure that the building insurance policy is adequate to cover loss and/or damage to your building and the policy is kept in accordance with the terms of the lease. The terms of the lease should give you the right to be provided with Certificates of Currency upon request or inspect the certificates of insurance at any time in respect of any insurance cover that the lessee is required to take out in respect of the premises. Be diligent in checking the certificates and conduct regular reviews (at least on an annual basis) to ensure that the Policies remain current and your building is adequately and continuously covered in the event of loss and/or damage.
Lessor’s intentions at the end of the lease
In the final year of the lease, you will need to give written notice to the lessee of your intentions at the end of the lease. This must be done at least 6 months before the lease term ends. The notice must either:
- offer the lessee a renewal of the lease on terms and conditions specified in the notice; or
- inform the lessee that you do not propose to offer a renewal of the lease.
If you fail to give the above notice and you receive a request from the lessee that it wishes to extend the lease, then you are obliged to extend the lease for the period requested by the lessee. It is important to be aware that the extended period doesn’t come to an end until 6 months after you have subsequently provided the above notice to the lessee (unless the request to extend is less than 6 months). During the extended period, the lessee may terminate the lease by giving at least one month’s notice in writing to the lessor. If you do not give notice and the lessee does not request an extension, then the lease will come to an end.
If the lessee is in breach of the lease, refer to the terms of your lease and the Act and follow the processes that deal with a breach by the lessee. If in doubt, seek professional advice before any action is taken to terminate the lease, take possession of the premises, or remove and destroy goods belonging to the lessee. Acting in haste without checking what your obligations are when dealing with a lessee in default can potentially expose you to the risk of a claim being made against you by the lessee for a breach of your obligations under the lease and under the Act.
In addition to the considerations I have raised above, before signing any lease governed by the Act it is prudent to ensure that the terms and conditions contained in the lease comply with the Act. It is also vital that the lessee has received a Disclosure Statement detailing all applicable costs and outgoings, and that the details in the Disclosure Statement are correct and consistent with the lease.
For further information, please contact the author.
This article is posted in Adelaide, South Australia by Tri-meridian Corporate & Commercial Law and is intended to be used as a guide only. It is not, and is not intended to be, advice on any specific matter. We do not accept responsibility for any acts or omissions resulting from reliance upon the content of this article. Before acting on the basis of any material in this article, we recommend that you consult your professional adviser.