Dan: Welcome to this edition of the PD Law podcast, where we’re talking commercial leases with PD Lawyer, Shelley Foot. Shelley, when it comes to drafting leases, one key facet of a course is the inclusion of outgoings. What are they and what’s the importance of them?
Shelley: Essentially, outgoings all the reasonable expenses a landlord incurs that are directly related to the operations, maintenance, or repair of the center or building. So for example, these are costs like your rates, your cleaning costs, rubbish removal, repairs and maintenance, management costs, body corporate fees, that’s just a few to name of the major costs.
So of course, when drafting a retail shop lease, as a landlord, you want to make sure the lease is a net lease rather than a gross lease, meaning that the tenant pays the base rental amount, and then on top of this, contributes to the proportion of the outgoings. This ensures that you as a landlord, are in the best financial and commercial position to pass on the cost to the tenant. One mistake we often see in retail shop leases is the landlord forgetting to provide the estimation of outgoings to the tenant within the time frame stipulated under the Retail Shop Lease Act.
So as a landlord, it is crucial you diarise these critical dates and make sure you’re providing the tenant with the estimate of outgoings at least one month before the period to which the estimate relates.This will keep you out of trouble and make sure you comply with the act.
Dan: Now, another important aspect is permitted use. What is this and how should it be drafted?
Shelley: The permitted use within a lease, in simple terms, is how the tenant is allowed to use the premises during the term of the lease. When drafting the permitted use, it is important to have a clear definition which is not too narrow or not too wide.
If the permitted use is drafted too wide, then there is a possibility the tenant can get away with operating under a use which you may have never contemplated. This in turn can then cause increased cost with your insurance or disputes with other tenants who have may have been offered exclusivity within the centre. For example, you may have a tenant who opens a tattoo shop under the permitted use of tattooing, but then starts offering cosmetic tattooing as well. Another tenant in the centre was maybe offered exclusivity of this cosmetic tattooing and piercings and has been there for a number of years.
You can now see the issue is whether cosmetic tattooing actually falls under the permitted use of tattooing, and you can see how this can get out of hand really quickly and the lines can be blurred. So when in doubt, you should always consider whether a special condition can be used to exclude particular things from the permitted use to remove any ambiguity and a risk of dispute in the future.
Dan: What about rent reviews?
Shelley: We obviously want to make sure our clients are in the best possible commercial position when dealing with rent reviews, especially with changing markets and so extra careful attention is required when drafting the rent review mechanisms under the act.
Dan: Another thing that obviously landlords are very worried about is the failure of tenants to vacate. What can you do in that regard?
Shelley: Vacating tenants is one of the most common lease disputes we see here at PD Law, particularly tenants leaving the premises with damage or leaving personal property behind. This has significantly increased since COVID, where specific tenants can no longer afford the rent or have had to up and leave and go back to their hometown.
So with any of our commercial leases, we always include provisions that the tenant must vacate the premises in good repair with fair wear and tear obviously being acceptable, and remove any of their property from the premises when vacating. The last thing you want as a landlord when trying to find a new tenant is having to figure out how to deal with property left behind and the cost associated with removing this property, especially if it’s large, hefty items.
So as a landlord entering into a lease, you basically just want to make sure there’s some clause within the lease that ensures if there’s abandoned property by the lessee that you can remove it, you can store it, you can do what you wish with it, and the costs are passed on to the tenant.
Dan: Now, what about exercise of option? What does it mean and is it important?
Shelley: An option is a clause in the lease which grants the tenant the ability to renew the tenancy for an additional term or terms. So for example, in a lease, the initial term may be five years and the tenant may have an option to renew or extend the lease for a further two years.
When considering your option terms as a landlord, it is a good idea to consider your long term financial strategy. For example, if you have plans to sell the premises in the future, a longer lease term with an option period may be more commercially viable and more appealing to potential buyers. Alternatively, you may want to consider whether having no options and the ability to renegotiate a fresh lease at the end of the term would be more beneficial for your circumstances.
In terms of your obligations regarding option periods as a landlord, under the Act, you must give a written reminder to the tenant at least two months, but no more than six months before the option date. Once the tenant receives this notice and has given their notice to exercise the option, you as the landlord must give a disclosure statement within seven days of receiving the notice from the tenant.
If you fail to do this, the tenant has the right to terminate within six months of entering into the renewal and also has the right to claim compensation for loss or damage. So, Dan, as you can imagine, this can be catastrophic for a landlord, especially if you know this lease is their main or sole form of income.
Again, we cannot stress this enough, but as a landlord, it is so important to diarise these dates somewhere easily accessible where you can keep track of them all.
Dan: That was Lawyer Shelley Foot from PD Law. Now, of course, if you’ve got any questions about leasing, reach out to the team at pdlaw.com.au
Disclaimer: This podcast has been transcribed using AI. There may be errors that were lost in the translation.