Commercial Leases (NSW)
Commercial leases are contracts between landlords and business owners for renting property owned by the landlord. Many businesses choose to enter into a commercial lease and rent a property to operate their business from rather than purchasing a property. This is often because doing so requires less of an investment of capital. This article deals with commercial leases in New South Wales.
Commercial leases vs residential leases
The law for commercial leases is different to that for residential leases. In New South Wales, the common law of contract applies, and the contract for the lease will dictate its terms. Leases that have terms of more than three years for land that is Torrens title land must be registered with the New South Wales Office of Land and Property Information for the tenant’s exclusive possession to be guaranteed. There are also a few pieces of legislation that may apply to commercial leases. These include the Conveyancing Act 1919, the Real Property Act 1900 and for leases relating to retail shops, the Retail Leases Act 1994.
Commercial leases in New South Wales have some implied terms through common law and statute. These terms include the following:
- That the tenant will maintain the premises in good condition;
- That the tenant will pay rent;
- That the tenant will allow the landlord to inspect the property; and
- That the landlord will be allowed to enter the premises where the tenant has breached the lease terms or has failed to pay rent.
A commercial lease which is also a retail lease in New South Wales must conform to the requirements under the Retail Leases Act 1994. A commercial lease will usually fall within the definition of a retail lease if it is for a property that is an outlet or shop front in a shopping centre or retail precinct and is used for selling goods and services to the public.
However, retail leases that are for a term of fewer than five years or more than twenty-five years, or for large retail spaces of more than 1000m2, are not covered by the Retail Leases Act 1994. The Act was written primarily for the protection of tenants entering into commercial retail leases. It also provides avenues for parties to such leases to resolve disputes at a low cost.
Some of the ways that tenants are protected under retail leases include the following:
- Landlords are required to provide tenants of retail leases with a copy of a document called the retail tenancy guide and the relevant lease while the parties are negotiating the lease;
- Security deposits or guarantees provided by the tenant must be handled in a specific way by the landlord;
- If there is a market review of the rent paid for the property and it is determined that the market rent is lower than what is currently paid then the rent can be lowered. Clauses which prevent rent from being reduced are sometimes found in commercial leases but cannot be included in retail leases;
- If the property is due to be demolished, and as a result, the retail lease is expected to be ended, a retail lease tenant must be given at least six months notice about this. The retail lease tenant must also be compensated for work performed fitting out the shop if this occurs.
Some things to be careful of
If you are negotiating a commercial lease in New South Wales, some of the things that are important to consider are the following:
- What is the term of the lease and is there an option for renewing it? It is important to be clear what the duration of the lease is so that proper arrangements can be made if the tenant is required to move after the period of the lease. If the commercial lease includes an option to renew it should be made clear when and how this option can be exercised;
- What is the amount of rent payable and will rent reviews be conducted? No law or regulation stipulates what rents of commercial premises should be. The amount of rent should be negotiated between the parties to the commercial lease. To avoid disputes the timing of rent reviews and the basis upon which the rent will be reviewed should also be specified in the commercial lease;
- What are the expenses that will be paid by the landlord and tenant apart from the rent? For example, which party will be responsible for the water bill and the electricity bill;
- Details about any bond that the tenant may pay should be agreed upon and included in the commercial lease. Although legislation for commercial leases does not require a bond to be paid by the tenant, most commercial leases require such a bond to be paid. Details about how the bond is to be handled when it will be returned to the tenant, and under what circumstances it can be withheld, should be agreed upon between the parties and included in the commercial lease agreement;
- Who is responsible for fixtures and fit-out of the premises should be agreed upon and included in the commercial lease. Under the New South Wales legislation for retail leases, where there is no agreement between parties about who is responsible for this, it will be the tenant’s responsibility. Tenants are not only responsible for the fit-out of the premises and installation of fixtures, but are also responsible for returning the premises to their original state at the end of the lease;
- What repairs and maintenance of each party to the agreement is responsible for should be clearly outlined in the commercial lease agreement. Repairs and maintenance are often the most common subject about which parties to commercial leases find themselves in dispute. The commercial lease should clearly define what is the responsibility of either party to avoid conflicts. Most of the time the tenant has responsibility for general repairs and maintenance while the landlord is required to maintain structural and capital items;
- Whether the tenant will be required to refurbish the premises should also be discussed and determined in negotiations. Some commercial leases require this where the term is for a significant duration. If this is a requirement of the commercial lease then the detail of what the required refurbishment encompasses and the time frames in which it must be completed, and any other relevant information should be included in the commercial lease.
Dealing with commercial lease issues in New South Wales
If a dispute arises between a landlord and a tenant during a commercial lease term, the starting point for resolution is a direct discussion between the parties. However, if this is unsuccessful, the matter may be taken to court for a determination to be made.
If the commercial lease is a retail lease, the Registrar of Retail Tenancy Disputes can mediate between the parties to achieve a resolution. Retail commercial lease disputes can also be heard by the NSW Civil and Administrative Tribunal. However, this Tribunal can only award compensation up to $400,000.
If you require legal advice or representation in any legal matter please contact Armstrong Legal.