News & Events

Commercial Lease

— 17 November, 2016

One of the most important aspects when running a business is to consider the premises from which the business is run.  Despite the rise of e-commerce businesses in the modern economy, thousands of businesses across the country are run within bricks-and-mortar premises.  This is why it is important that the proprietor of the business ensures that they have a Lease in place to protect the interests of their business with respect to its location.

Should the proprietor of the business not be the owner of the shop from which the business operates, the proprietor must be in a position to negotiate a Commercial Leasing Agreement with the Landlord of that premises.  The standard Commercial Lease Agreements which are used on a daily basis can be quite voluminous and complex due to the fact that they must protect both the interests of the Landlord and also the Tenant for the duration of time that the Lease is in effect.  A Commercial Lease Agreement needs to be forward looking in respect to attempting to mitigate any potential issues or conflicts of interest which may come about at some time in the future as the term of the Lease winds down.

Whilst some people choose to enter into a License Agreement, Tenants should be aware that this does not grant exclusive possession of the property to the Tenant in the same way that a Lease Agreement does.  The Lease grants the Tenant exclusive use of the property for the period of the Lease and, in exchange, the Landlord receives rent from the Tenant.  Any Commercial Lease which has a duration of longer than three years should also be registered on the Title of the land in question so as to protect the Tenants in the case, for example, where the Landlord chooses to sell the property to another party.  The registration of the Lease on title thereby protects the Tenant’s interest and their exclusive possession of the premises.

Some of the most prominent features of a Lease may be the following:

Rent:The payment of rent is an essential element of any Commercial Lease.  As stated above, the Landlord accepts the Tenant’s right to exclusive use of the property in exchange for the payment of rent and the Commercial Lease Agreement will usually contain an express clause which gives the Landlord the right to terminate the Lease and take possession of the property should the Tenant fall in arrears of those rent payments.

 

Bonds:As with most Lease Agreements, Commercial Lease Agreements usually contain a Bond Agreement.  It should be noted that there are no legislative requirements in respect to the Lease Agreement containing such provisions. The terms of the Bond Agreement, such as the amount and the withholding and repayment of the bond are to be decided between the two parties.  It is important to specify the terms upon which the termination or expiry of the Lease effects the bond funds being returned to the Tenant.

 

Outgoings:This is another quite common condition contained in Lease Agreements. The provision will usually outline those outgoings which the Tenant is liable for such as, water rates, land tax, management fees, and other taxes in relation to the premises.

 

Terms:The duration of the Commercial Lease Agreement, and any option periods of extension which may be contained in that agreement, are obviously quite an important consideration with respect to the conducting of the business from those premises.  It is important to negotiate prior to the commencement of the Lease what the term of that Lease will be and whether there will be any options to renew the Lease into the future.

 

Fixtures:One of the most costly exercises in relation to a Tenant entering into a Commercial Lease Agreement is the cost of installing shop fixtures and fittings. Furthermore, upon the expiry of the Lease it is usually the responsibility of the Tenant that they remove the fit out and restore the shop to the condition it was in prior to the commencement of the Lease.  Another important consideration with respect to such clauses is the inventory of the fixtures contained in the premises prior to the commencement of the Lease and the Tenant’s right to install further fixtures or remove existing ones.

 

Maintenance:It is the usual provision of a Commercial Lease Agreement that the responsibility for the maintenance of the premises are split between the two parties.  Commonly, it is the responsibility of the Tenant to undertake general repairs and maintenance, while it is usually the responsibility of the Landlord to repair any structural defects to the premises.  As some maintenance issues may be quite expensive it is important that the parties negotiate the terms of these clauses prior to the commencement of the Lease.

 

Refurbishment:While some Leases may require the Tenants to refurbish the premises at regular intervals, and this may in fact be beneficial the Tenant’s business, it must be appreciated that this could be quite costly and expensive. It is therefore imperative that the refurbishment provisions in the Commercial Leasing Agreement clearly specify the terms and the schedule of any refurbishments required by the Landlord.

 

Although Commercial Lease Agreements may be quite complex and extensive, they are certainly an important part of running your business.  You need not feel overwhelmed by the process of negotiation and structuring these agreements as the friendly, professional and experienced staff at Access Law Group can assist you by providing the right advice and remove the stress associated in this process and leave you to concentrate on the much more important task of running your business successfully.

Retail Lease

— 17 November, 2016

Most boutiques and shops in NSW would be classified as a retail shop and would likely be subject to the provisions of the Retail Leases Act 1994 (“the Act“).  The Act governs the relationship between the Landlord and the Tenant of Leases which fall under the terms of the Lease.

Both the Landlord and the Tenant should be aware of their respective rights and obligations prior to entering into a Retail Lease and should obtain appropriate financial and legal advice regarding the document.

Although most shops and boutiques would be covered by the Act, Sections 5 and 6 of the Act mandate those which are excluded from coverage of the Act.  These include Leases with respect to premises which are over 1,000m² of lettable area, Leases which are over 25 years or more and also Leases which had began prior to the commencement of Section 6. Unlike Commercial Lease Agreements, a Retail Lease begins before the Lease is signed in the event that either the payment of rent or possession of the shop is taken, even if the Lease has not been signed.

It is an offence under the Act if the Landlord does not provide a copy of the Lessor’s Disclosure Statement to the Lessee, or if there is a serious misrepresentation contained in that Statement. This may give rise to the right of the Lessee to terminate the Lease within the first six (6) months by giving written notice to the Landlord to that effect.

Prior to entering into a Retail Lease, the Landlord must give to the Tenant a copy of the Disclosure Statement together with a Retail Tenant’s Guide within certain time frames which are provided for by the Act.  The form of both the Lessor’s Disclosure Statement and the Lessee’s Disclosure Statement is provided for by the Act and such forms are available on the website from the Office of Fair Trading New South Wales.

Under Section 16 of the Act, it is required that a Retail Lease be for a minimum period of five (5) years, unless the Landlord is provided with a Section 16 waiver which is given to the Landlord upon the Lessee receiving advice with respect to the Section by their solicitor or their conveyancer.

It is an offence under the Act for either party to misrepresent or mislead the other party. Such an offence may make that party liable to compensation for damages suffered as a result of the misrepresentation to the other party.  This is important as misrepresentations included in a Lessor’s Disclosure Statement can, in certain circumstances, entitle the Lessee to terminate the Retail Lease within six (6) months of the Tenant entering into such Lease.

Fit out costs can be quite expensive and they are commonly attributable to the Tenant being liable for the costs of those works.  For this reason, it is pertinent that the parties are quite clear about the specification of the works which are required prior to the commencement of the Retail Lease in order to avoid disputes which may arise as to whether the works were necessary or not.  The Act provides that a maximum amount for the costs of these works is agreed to in writing by the Lessor and the Lessee prior to the commencement of the Lease.  This means that the Act prohibits the Lessor from attempting to charge for works which exceed the maximum agreed value in writing.

The Act strictly prohibits Landlords of Retail Leases from asking or accepting ‘key money’ from the Lessee or otherwise including clauses in the Lease or Contract which refer to the payment of key money to the Landlord.  Key money may be defined as a “premium, non-repayable bond or otherwise… or any benefiting connection with the granting, renewal, extension or assignment of a lease.”

It is common for a bond to be requested by the Landlord in respect to a Retail Lease and these are usually given either in the form of a cash bond, which is to be lodged by the Landlord with the New South Wales Retail Bond Scheme or a bank guarantee which is provided in lieu of a cash bond.  Banks issue bank guarantees under which they guarantee to the Landlord the performance of the Tenant to the terms of the Lease.  It is worth noting that if the Landlord requests that the bank pay the money under the guarantee, the bank must do so, regardless of the merits of the Landlord’s claims.

Another common feature of Retail Leases, in our experience, is the insertion of relocation and/or demolition clauses.  As the name suggests, a relocation clause allows the Landlord to relocate the premises or terminate the Retail Lease prior to its expiry, usually because the Landlord is undertaking renovations.  The Act will only permit the insertion of the relocation clause on the basis that the Landlord gives at least three (3) months written notice to the Tenant in relation to any move.  In accordance with the Act, the Landlord shall pay the reasonable costs of the Tenant’s relocation which can be agreed upon by the parties or alternatively, by a quantity surveyor which will work them out.

The Act also permits a Retail Lease to contain a demolition clause which enables the Landlord to end the Lease if they require the shop to be vacated for works.  The Landlord is obliged to provide at least six (6) months written notice that the Lease will end because of demolition.  During the six (6) month period the Tenant may end the Lease with a seven (7) day written notice to the Landlord.

If the Retail Lease includes an option to renew, then the Landlord will be obliged to provide the Tenant with a new Lease on the terms required by that option.  However, if there is no such provision for renewal then the Landlord is not obliged to offer the Lessee a new Retail Lease.  The Act requires the Landlord, between six (6) to twelve (12) months before the expiry of the Retail Lease, to write to the Tenant and either:-

  1. Offer renewal or extension of the Retail Lease on terms specified in the notification; or
  1. Inform the Tenant that the Landlord does not propose to offer renewal or extension of the Retail Lease.

Negotiating and drafting the terms of a Retail Lease can be quite a daunting task and it requires the right legal advice to ensure that your interests, whether they be as a Landlord or a Tenant, are protected.  The experienced, friendly and professional team at Access Law Group can assist you with this process and help you to ensure that the terms as a party to a Retail Lease are as favourable as possible.

At Access Law Group, it is our experience that organisations often encounter difficulties when they attempt to enforce liquidated damages clauses in their contracts. A recent High Court decision has shed some light on when a liquidated damages clause may be deemed to be invalid as a penalty.

The matter of Paciocco v Australia and New Zealand Banking Group Ltd (“Paciocco) concerned a late payment fee charged by the ANZ Bank on consumer credit card accounts. The appellants alleged that the late payment fee was unenforceable as a penalty.

As set out in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79, the essence of a penalty is “a payment of money stipulated as in terrorem of [to threaten] the offending party”.

Justices Mason and Deane in Legione v Hateley (1983) 152 CLR 406 held that “a penalty…is in the nature of a punishment for non-observance of a contractual stipulation; it consists of the imposition of an additional or different liability upon breach of the contractual stipulation”.

A penalty is therefore an amount of money to be paid upon breach that acts as a “threat” to ensure compliance, or to punish non-compliance, as opposed to compensating a party for its loss. As a comparison, liquidated damages are “a genuine covenanted pre-estimate of damage”.

However, it is often difficult, if not impossible, for a party to a contract to accurately forecast loss or damage caused by a party’s breach. This is because, in drafting a liquidated damages clause, a party will often be seeking to protect its interests beyond merely the performance of the contract.

In these cases, where damage to a party’s interest is “extremely complex, difficult, and expensive” to quantify, the Court has held that it is reasonable for parties to agree as to the amount to be paid upon breach, unless that amount is “extravagant”, “unconscionable”, “exorbitant”, or “out of all proportion” to the party’s interests according to the circumstances of the case.

In Paciocco, the ANZ argued that the costs occasioned by late payments was very difficult to calculate, considering the various costs, risks and liabilities associated with late payment that it had to take into account in the course of doing business.

In finding that the late payment fee was not a penalty, the Federal Court held that loss should be determined by looking “at the greatest possible loss on a forward looking basis” with reference to “the economic interests to be protected”. On that basis, the late payment fee was found to not be out of all proportion to the commercial interests of the ANZ in avoiding the costs associated with late payment. Having regard to the circumstances, including the ANZ’s interests and the ANZ’s relationship with the customer, the High Court affirmed the Federal Court’s decision.

The High Court has affirmed that penalties remain unenforceable, but has given a strong indication that regard should be taken to the range of interests, including actual recovery costs, regulatory costs and liquidity requirements that a party seeks to protect, and not merely the interest in performance of the contract.

In determining amounts to be stipulated in liquidated damages clauses, organisations should ensure that they turn their minds to the legitimate impact to their commercial interests in the event of a breach of the contract. Liquidated damages clauses should be drafted in such a way as to make as clear as possible that the amount stipulated is a genuine pre-estimate of the loss that would be incurred upon breach.

Our team at Access Law Group is experienced in drafting liquidated damages clauses, and would be happy to assist in quantifying your organisation’s interests that may be effected by a breach of contract.