Practice Paper P305 Commercial Leases PDF 2023

PRACTICE PAPER P305 Commercial Leases Edited by Michael Redfern LLB (Hons) Barrister and Solicitor of the Supreme Court of Victoria Revised by Megan Thorburn BSc, DipLaw (LPAB), GDLP, AccS(Prop) Principal, CCP Law Adjunct Lecturer, The College of Law Victoria August 2023 © 2023 The College of Law Limited This publication is copyright. Except as permitted under the Copyright Act 1968 (Cth), no part of this publication may be reproduced by any process, electronic or otherwise, without the specific written permission of the copyright owner. Neither may information be stored electronically in any form whatsoever without such permission. Disclaimer The practice papers have been prepared as practice guides primarily for students at The College of Law and also for legal practitioners. They are not intended to be a comprehensive statement of the law or practice and should not be relied upon as such. If advice on the law or practice is required or required to be given, professional advice should be sought and practitioners should undertake their own legal research. P305 Commercial Leases CONTENTS 1 INTRODUCTION.................................................................................................................... 8 1.1 Scope of paper....................................................................................................................... 8 1.2 Overview of the lease transaction.......................................................................................... 8 2 RETAIL TENANCIES LEGISLATION..................................................................................... 9 2.1 Relevance of the legislation.................................................................................................... 9 2.2 Scheme of the legislation....................................................................................................... 9 3 RETAIL LEASES ACT 2003................................................................................................. 10 3.1 Overview............................................................................................................................... 10 3.2 Application of Retail Leases Act........................................................................................... 10 3.3 Written lease......................................................................................................................... 11 3.4 Disclosure requirements....................................................................................................... 11 3.5 Copy of signed retail lease to be provided to tenant............................................................ 13 3.6 Premiums and “key-money”................................................................................................. 13 3.7 Security deposits.................................................................................................................. 13 3.8 Rent review provisions......................................................................................................... 13 3.9 Outgoings and indemnities................................................................................................... 14 3.10 Duration of a lease and options to renew............................................................................. 16 3.11 Protection of tenant’s possession and other rights.............................................................. 17 3.12 Assignment and subletting................................................................................................... 17 3.13 Landlord’s obligation to repair.............................................................................................. 18 3.14 Refurbishment and relocation, demolition and damage....................................................... 19 3.15 Fit outs.................................................................................................................................. 19 3.16 Additional requirements for leases of retail shopping centres............................................. 19 3.17 Unconscionable conduct...................................................................................................... 20 3.18 Other provisions of the Retail Leases Act............................................................................ 20 3.19 Disputes................................................................................................................................ 20 4 AGREEMENT FOR RETAIL LEASE.................................................................................... 21 4.1 Need for agreement.............................................................................................................. 21 4.2 Formal requirements............................................................................................................. 21 4.3 Conveyancing procedures.................................................................................................... 22 5 FORMAL REQUIREMENTS OF LEASES........................................................................... 23 5.1 Overview............................................................................................................................... 23 5.2 Capacity................................................................................................................................ 23 5.3 Deed..................................................................................................................................... 23 5.4 Registered or unregistered lease......................................................................................... 23 5.5 Foreign acquisition................................................................................................................ 23 © The College of Law Limited 3 THE COLLEGE OF LAW PROPERTY 5.6 Mortgagee’s consent.............................................................................................................24 6 LEASE COSTS AND DISBURSEMENTS.............................................................................24 6.1 Apportionment of liability for costs.........................................................................................24 6.2 Bill for costs and estimated disbursements...........................................................................25 6.3 Duty........................................................................................................................................25 7 DRAFTING AND NEGOTIATING COMMERCIAL LEASES.................................................26 7.1 Significance of lease for parties............................................................................................26 7.2 Role of the landlord’s lawyer.................................................................................................26 7.3 Role of the tenant’s lawyer....................................................................................................27 7.4 More important lease provisions...........................................................................................27 7.5 Disclosure as to building energy efficiency...........................................................................28 7.6 Parties to a commercial lease...............................................................................................28 7.7 Drafting a lease......................................................................................................................29 7.8 Submitting draft lease............................................................................................................29 7.9 Negotiations...........................................................................................................................29 7.10 Suggested leasing practice...................................................................................................30 7.11 Separate representation of parties........................................................................................30 8 ACTING FOR THE LANDLORD...........................................................................................31 8.1 When the Retail Leases Act applies......................................................................................31 8.2 Obtaining instructions for preparation of lease......................................................................31 8.3 Searches................................................................................................................................31 8.4 Lease document....................................................................................................................32 8.5 Submission of lease..............................................................................................................32 8.6 Copy for landlord...................................................................................................................32 8.7 Negotiations...........................................................................................................................32 8.8 Mortgagee’s consent.............................................................................................................32 8.9 Closing stages.......................................................................................................................33 8.10 Reporting to the client............................................................................................................33 9 ACTING FOR THE TENANT.................................................................................................33 9.1 Considering the lease............................................................................................................33 9.2 Searches and enquiries.........................................................................................................34 9.3 Negotiations and amendments of draft lease........................................................................34 9.4 Closing stages.......................................................................................................................34 10 TAX IMPLICATIONS.............................................................................................................35 10.1 Capital gains tax....................................................................................................................35 10.2 Goods and services tax.........................................................................................................35 11 GUARANTEES......................................................................................................................35 11.1 Guarantees generally............................................................................................................35 4 © The College of Law Limited P305 Commercial Leases 11.2 Formal requirements............................................................................................................. 36 11.3 Protection of guarantors....................................................................................................... 36 11.4 Transactions involving guarantors........................................................................................ 36 12 LEASE CONTENT................................................................................................................ 37 12.1 General................................................................................................................................. 37 12.2 Parties................................................................................................................................... 37 12.3 Subject matter of the lease................................................................................................... 37 12.4 Lease term............................................................................................................................ 38 12.5 Option to renew the term...................................................................................................... 38 12.6 Rent and rent review............................................................................................................. 39 12.7 Rates, taxes and operating expenses.................................................................................. 40 12.8 Permitted use........................................................................................................................ 40 12.9 Assignment, subletting and mortgage over lease................................................................ 41 13 NEGOTIATIONS TO SETTLE LEASE................................................................................. 42 13.1 Making negotiations.............................................................................................................. 42 13.2 Negotiated provisions........................................................................................................... 42 14 SUBLEASE........................................................................................................................... 43 14.1 Overview............................................................................................................................... 43 14.2 Conveyancing aspects......................................................................................................... 44 15 TRANSFER OF LEASE........................................................................................................ 44 16 MORTGAGE OF LEASE...................................................................................................... 44 17 RENEWAL OR EXTENSION................................................................................................ 45 18 VARIATION.......................................................................................................................... 45 19 SURRENDER....................................................................................................................... 45 20 EXPIRY OF LEASE.............................................................................................................. 46 21 MERGER.............................................................................................................................. 46 22 DISCLAIMER........................................................................................................................ 46 23 TERMINATION..................................................................................................................... 46 APPENDICES..................................................................................................................................... 47 APPENDIX 1 – LEASE CHECKLIST – LANDLORD.......................................................................... 47 APPENDIX 2 – LEASE CHECKLIST – TENANT................................................................................ 55 © The College of Law Limited 5 THE COLLEGE OF LAW PROPERTY ABBREVIATIONS BEEC building energy efficiency certificate BEEDA Building Energy Efficiency Disclosure Act 2010 (Cth) CGT capital gains tax Commissioner Small Business Commissioner GST goods and services tax GST Act A New Tax System (Goods and Services Tax) Act 1999 (Cth) LIV Law Institute of Victoria LIV commercial lease Law Institute of Victoria commercial lease PLA Property Law Act 1958 (Vic) RLA Retail Leases Act 2003 (Vic) RTA Retail Tenancies Act 1986 (Vic) RTRA Retail Tenancies Reform Act 1998 (Vic) TLA Transfer of Land Act 1958 (Vic) VCAT Victorian Civil and Administrative Tribunal REFERENCES CCH Australia Limited, Lang’s Commercial Leasing in Australia (looseleaf and online) CCH Australia Limited, Victorian Conveyancing Law and Practice (looseleaf and online) Duncan W D and S Christensen, Commercial Leases in Australia (Thomson Reuters, 9th ed, 2020) LexisNexis, Australian Encyclopaedia of Forms and Precedents (looseleaf and online) LexisNexis, Australian Tenancy Law and Practice (looseleaf and online) LexisNexis, Retail Leases Victoria (looseleaf and online) 6 © The College of Law Limited P305 Commercial Leases ACKNOWLEDGMENTS This practice paper was edited by Michael Redfern LLB (Hons) and is regularly reviewed and updated (as necessary) by College of Law academic staff and other legal practitioners. Previous reviewers include Michael Redfern in 2006–2008, Robyn Jackman BA, LLB in 2009, Geoff Nicholson in 2010–2011, Kamilla Shaw LLB (Latrobe) in 2012, Silvana Marasco LLB (Melb), BComm (Melb) in 2013, Jane Garber-Rosenzweig in 2014, Kristine Pham LLB (UTAS) in 2015, Lee Lesley Horton BA, DipLaw (LPAB), GDLP in 2016, Murray McCutcheon AM, LLB (Melb) in 2017, Megan Thorburn BSc, DipLaw (LPAB), GDLP, AccS(Prop) in 2018–2019 and 2021–2022, and Simon Libbis BJuris, LLB, AccS(Prop) in 2020. Current revision by Megan Thorburn, August 2023. © The College of Law Limited 7 THE COLLEGE OF LAW PROPERTY 1 INTRODUCTION 1.1 Scope of paper This practice paper deals with commercial leases, that is, leases of premises used for commercial purposes (for example, shops, factories and offices) as distinct from residential leases. A commercial lease is an agreement between the owner of commercial property and a third party regarding the occupancy of the premises by the lessee. A commercial lease sets out the rights and obligations of each party. The comments in this paper are confined to leases of land under the Transfer of Land Act 1958 (Vic) (TLA). The terms and conditions of leases of land under the general law system of title, Crown land and reserved Crown land are substantially similar to leases of land subject to that Act. There are some special technicalities with leases of unreserved Crown land and reserved Crown land, but these are beyond the scope of this paper. 1.2 Overview of the lease transaction Lawyers use the terms “landlord” and “tenant” and “lessor” and “lessee” in lease documentation. This paper uses the terms “landlord” and “tenant”. Preliminary questions when dealing with a commercial lease include: Will the lease be subject to the retail tenancies legislation? Should there be a lease or only an agreement for lease? What formal requirements are required in respect of the documentation, including registration? In respect of leases subject to the retail tenancies legislation, what compliance requirements are placed on the parties and particularly the landlord? When acting for a landlord, what enquiries should be made of the tenant? When acting for a tenant, what enquiries should be made in respect of the landlord, the land, and the improvements on the land and what protective measures should be put in place? See Appendices 1 and 2 for checklists for landlords and tenants of commercial leases. These checklists include items relating to leases subject to the RLA and these must be carefully considered. From the landlord’s point of view, in particular, regard must be had to: pre-lease disclosure requirements; notice requirements, especially in respect of renewals of leases; provisions dealing with legal costs, land tax and outgoings, and the outgoings, estimates and statements required to be provided to tenants; and minimum 5-year term provisions and the procedures required if the minimum term is not to apply. From the tenant’s point of view, special reference should be made to: minimum 5-year term provisions; market review provisions where a market review will be required of the rent during the course of a lease or at the commencement of an option to renew term; tenant’s rights if the pre-lease disclosure requirements have not been complied with and the requirement of notice to be given to the landlord if a disclosure statement has not been provided; requirements of the landlord in respect of outgoings and outgoings estimates and statements, and the tenant’s rights should these not be complied with; and dispute resolution provisions that regulate the way disputes may be pursued. 8 © The College of Law Limited P305 Commercial Leases 2 RETAIL TENANCIES LEGISLATION 2.1 Relevance of the legislation If the retail tenancies legislation applies to the lease: some preliminary steps need to be taken before entering into a lease; aspects of the lease are governed or affected by provisions contained in the legislation; if the lease is inconsistent with the provisions of the legislation, those lease provisions are void to the extent of the inconsistency; and the lease is affected by the provisions of the legislation relating to dispute resolution. Many aspects of commercial leases are not affected by the provisions of the retail tenancies legislation. Other statutes and provisions of law as they apply to commercial leases that may be relied upon include: TLA; Property Law Act 1958 (Vic) (PLA); and Australian Consumer Law (Competition and Consumer Act 2010 (Cth) Sch 2). 2.2 Scheme of the legislation Leases of retail premises in Victoria may be subject to any of the three principal statutes: Residential Tenancies Act 1997 (Vic); Retail Tenancies Reform Act 1998 (Vic) (RTRA); or Retail Leases Act 2003 (Vic) (RLA). In general terms: leases that, when entered into, were subject to the Retail Tenancies Act 1986 (Vic) (RTA) and that are still in force are still subject to that Act as amended by the RLA; leases that, when entered into, were subject to the RTRA and that are still in force are still subject to that Act as amended by the RLA; leases subject to the RTA that are renewed after the commencement of the RTRA will be subject to the RTRA and, again, when renewed after the commencement of the RLA will be subject to the RLA; and leases subject to the RTRA that are renewed after the commencement of the RLA will be subject to the RLA. Leases entered into before the commencement of the RTA that are renewed after the commencement of that Act but before the commencement of the RTRA will continue to not be subject to any legislation. Where these leases were renewed after the commencement of the RTRA, they will be subject to the RTRA, and if renewed after the commencement of the RLA, they will be subject to the RLA. Both the RTA and the RTRA contained qualifications in respect of their application based upon the floor area of the premises. These qualifications are no longer appropriate under the RLA, which instead relies upon the annual occupancy costs payable during the first year of the term. Accordingly, there may be leases that are subject to the RTA or the RTRA because of their floor area being less than the 1,000m2 qualification but that, when renewed after the commencement of the RLA, will not be subject to the RLA because the occupancy costs for the first year will exceed the $1m qualification contained in the RLA. Also, there may be leases that were not subject to the RTA or the RTRA because the area of the premises was above the 1,000m2 qualification but that, if renewed after the commencement of the RLA, will be subject to the RLA because the occupancy costs for the first year of the term do not exceed $1m. © The College of Law Limited 9 THE COLLEGE OF LAW PROPERTY Although this practice paper deals only with the RLA, lawyers should be familiar with the terms of the RTA and RTRA in respect of leases still in force that are subject to those Acts. 3 RETAIL LEASES ACT 2003 3.1 Overview The RLA established a system of regulation for retail leases entered into after its commencement and amended the RTA and the RTRA. Under RLA s 5(1), the Minister may make determinations (by notice published in the Government Gazette) as to the kind of business, premises, tenant and lease the RLA applies to, and has made a number of such determinations to date. 3.2 Application of Retail Leases Act The RLA applies to all leases of retail premises that are entered into or are renewed on or after 1 May 2003. “Lease” is defined as a lease, sub-lease or agreement for a lease or sub-lease, and may or may not be in writing: s 3. Retail premises means premises that, under the terms of the lease, are used or to be used either wholly or predominantly for (s 4(1)): the sale or hire of goods by retail or the retail provision of services; or carrying on a specified business or a specified kind of business as determined by the Minister under s 5. Section 4(2) sets out the premises that are excluded from the s 4(1) definition of “retail premises”. A lease is entered into on the earlier of when signed by all parties, when the tenant begins to pay rent or when the tenant enters into possession under the lease: s 7. The RLA does not apply to a retail premises lease for a term of less than 1 year: s 12(1). However, if the term is less than 1 year and the tenant is continuously in possession of the premises for 1 year or more under the lease as a result of the lease being renewed and/or continued, the Act will apply to the lease on and from the day on which the tenant has continuously been in possession of the retail premises for 1 year: s 12(2). If the RLA applies to a lease because of s 12(2), the landlord must provide the tenant with a disclosure statement within 60 days after this Act begins to apply to the lease pursuant to s 26: s 12(3)(b). Ministerial Determinations exempt the following premises from the application of the RLA: retail premises if the lease is wholly in respect of premises on the fourth or a higher level of a building that is not in a retail shopping centre and the premises are or are to be used wholly or predominantly for the retail provision of services: Determination 1 (Victoria, Victoria Government Gazette, S 75, 30 April 2003); leases granted by Barristers Chambers Ltd: Determination 2 (Victoria, Victoria Government Gazette, No S 99, 27 April 2004); leases for a period of 15 years or longer where they impose substantial works or financial obligations on the tenant: Determination 3 (Victoria, Victoria Government Gazette, No S 184, 23 August 2004); leases granted by the Melbourne Market Authority: Determination 4 (Victoria, Victoria Government Gazette, No S 175, 19 September 2005); certain council premises in which the leased premises may be used wholly or predominantly for community or charitable purposes: Determination 5 (contained in Victoria, Victoria Government Gazette, No S 99, 27 April 2004) (note that this Determination was revoked in 2015 by Determination 7 (Victoria, Victoria Government Gazette, No S 209, 24 July 2008)); 10 © The College of Law Limited P305 Commercial Leases leases of premises entered into after 1 January 2015 for certain community or charitable purposes: Determination 7 (Victoria, Victoria Government Gazette, No S 209, 24 July 2008); and premises used for farming or agricultural purposes: Determination 8 (Victoria, Victoria Government Gazette, No S 435, 30 October 2019). Pursuant to RLA s 5(1)(d), the Minister has determined that exempted premises are premises where the tenant is a body corporate, company or corporation (or a subsidiary of such a body corporate, company or corporation) listed on a stock exchange outside Australia: Determination 6 (Victoria, Victoria Government Gazette, No S 259, 18 August 2016). The Supreme Court of Victoria in Richmond Football Club Ltd v Verraty Pty Ltd VSC 597 confirmed that if the RLA applies to a lease at its commencement, then the RLA will continue to apply during the remainder of the term, even if the lease no longer satisfies the definition of “retail premises” during the term of the lease. 3.3 Written lease A landlord or a tenant must not enter into a retail premises lease that is not in writing and signed by all the parties to it. Doing so amounts to an offence, with a maximum penalty of 10 penalty units. However, a failure to comply with this provision does not make the retail premises lease illegal, invalid or unenforceable: RLA s 16. 3.4 Disclosure requirements New retail leases A landlord who offers to enter into a retail premises lease or advertises that retail premises are for lease must, as soon as they enter into negotiations with a person about the lease, provide them with a copy of the proposed lease, a disclosure statement and an information brochure about retail leases published by the Victorian Small Business Commissioner (Commissioner): RLA s 15. The landlord must notify the tenant of any changes to the proposed lease. Failure to do so is an offence: s 17(1B). At least 14 days before the lease is entered into, the landlord must give the tenant a disclosure statement and the completed proposed lease that includes particulars of the tenant, the rent and the lease term: s 17(1). If the landlord gives the disclosure statement and proposed lease less than 14 days before the lease entry date, the lease will start 14 days after the disclosure statement and proposed lease are given to the tenant: s 17(1C). Where there is a proposed assignment of a retail premises lease in connection with the sale of a business operating from the retail premises, the tenant must give the landlord and the proposed assignee a disclosure statement: s 61(5A). Where the tenant has exercised or is entitled to exercise an option to renew a retail premises lease or the parties to a retail premises lease enter into an agreement to renew the lease, at least 21 days before the end of the current term of the lease the landlord must give the tenant a disclosure statement: s 26. The form of the disclosure statement is provided for in the regulations made under the RLA. Under the Retail Leases Regulations 2023 (Vic) Schs 1–4, there are four separate disclosure statements for use in relation to: a new lease of premises not located in retail shopping centres; a new lease of premises located in retail shopping centres; the renewal of a retail premises lease; and the assignment of a retail premises lease where the premises will continue to be used for carrying on an ongoing business. © The College of Law Limited 11 THE COLLEGE OF LAW PROPERTY The Law Institute of Victoria (LIV) and the Commissioner have published four disclosure statements that comply with the disclosure requirements. Where the landlord fails to provide a disclosure statement, the tenant may give a written notice to the landlord, no earlier than 7 days and no later than 90 days after the lease is entered into, that the tenant has not been given a disclosure statement: s 17(2). If that notice is given, the tenant may then: withhold payment of rent and is not liable to pay rent until the day a disclosure statement is given; and give the landlord a written notice of termination of the lease before the end of 7 days after a disclosure statement is provided: s 17(3). The tenant may also terminate where a full copy of the lease is not given (s 17(1)(b)) or the disclosure statement contains information that is misleading, false or materially incomplete: s 17(5). The tenant may give the notice of termination within 28 days of the latest of when: the lease is entered into; the copy of the lease is given; or the disclosure statement is given: s 17(6). Where a notice of termination is given, in all cases the landlord may object in the terms provided by s 18. There is no provision in the RLA allowing for the recovery of rent paid by a tenant where a notice is given to the landlord pursuant to s 17(2). It would also appear that rent will not be recoverable under the usual principles for recovery for payments made under a mistake of law. This is because in order to give the s 17(2) notice, the tenant will usually be aware of the rights under the RLA and, therefore, will not be able to allege that the payments were made under any mistake of law. If the premises are not available for handover on the date specified in the disclosure statement, the tenant is not liable to pay rent until the premises are available for handover: s 17(4). A tenant is not required to pay for or contribute toward the cost of any fit out if the liability to pay is not disclosed in the disclosure statement: s 20. Leases of less than a year The disclosure statement required on the renewal of a lease (RLA s 26) is also required where a lease of less than 1 year is renewed or is continued, so that the tenant is continuously in possession of the retail premises for 1 year or more under the lease: s 12. In that situation: the disclosure statement must be provided within 60 days after the Act begins to apply to the lease; the tenant’s notice that it has not received the disclosure statement within 60 days is to be given no earlier than 7 days and no later than 90 days after the Act begins to apply to the lease; and the tenant’s right to terminate where information provided by the landlord in the disclosure statement is misleading, false or materially incomplete is to apply for the 28 days after the Act begins to apply to the lease: s 12(3)(b). Franchise licences A franchisor tenant of retail premises must provide to a franchisee licensee of the premises a copy of any disclosure statement given to the tenant: RLA s 96. The disclosure statement must include the details of any changes of which the tenant is aware or could reasonably be expected to be aware. 12 © The College of Law Limited P305 Commercial Leases 3.5 Copy of signed retail lease to be provided to tenant Within 28 days (or such other period as is agreed in writing) after being given a copy of the retail premises lease signed by the tenant, the landlord must give the tenant a copy of the lease signed by the landlord and the tenant: RLA s 22. If the landlord contravenes s 22(1), the tenant may give the landlord a written notice of termination at any time within 28 days of the tenant being given a copy of the lease or entering into the lease, whichever happens last: s 22(2). If a tenant gives the landlord a notice under s 22(2), the lease terminates 14 days after the notice is given: s 22(3). The same procedures for termination apply to this notice as are applicable to disclosure: s 22(4). 3.6 Premiums and “key-money” A landlord is prohibited from seeking or accepting “key-money” or consideration for goodwill: RLA s 23. “Key-money” is defined as money that a tenant is to pay or a benefit that a tenant is to give: by way of a premium or something similar to a premium, in that there is no real consideration given for the payment or benefit; and in consideration of: – a lease being granted or an agreement being made to grant a lease; – the variation of a lease; – the renewal of a lease or the granting of an option for the renewal; or – consent being given to the assignment of a lease or to the sub-leasing of the premises to which a lease relates: s 3. See McCrae Holdings Pty Ltd v Bronte Terrace Pty Ltd VCAT 2540 for the application of RLA s 23 and the meaning of “key-money”. 3.7 Security deposits Section 24 of the RLA imposes obligations on the landlord where a security deposit has been paid. Pursuant to these obligations: the money is to be held by the landlord on the tenant’s behalf in an interest-bearing account; the tenant is entitled to the interest if the money is returned; the landlord cannot refuse to accept a bank guarantee or deposit bond as a security bond; and if the tenant has complied with the lease, the landlord must return the security deposit within 30 days of the end of the lease. 3.8 Rent review provisions Section 35 of the RLA provides for where rent is to be reviewed under, or on renewal of, retail premises leases. Rent must only be reviewed on the basis of one of the following: a fixed percentage; an independent index; a fixed annual amount; current market rent; or a basis or formula prescribed by the regulations: s 35(2). Where a rent review provision does not comply with s 35(2), the rent is to be as agreed between the landlord and tenant or, failing that, as determined by a specialist retail valuer appointed by the Commissioner as the current market rent of the premises: s 35(7). © The College of Law Limited 13 THE COLLEGE OF LAW PROPERTY Wherever a market rent is required to be the basis for the review, the parameters for the determination of the current market rent are to be as described in s 37(2). If the current market rent is unable to be agreed by the landlord and the tenant, it is to be determined by a specialist retailer valuer, who is to be appointed by agreement between the landlord and the tenant or, failing that, by the Commissioner: s 37(3). Section 3 defines a “specialist retail valuer” as: (a) (b) for the purposes of a valuation relating to retail premises in a retail shopping centre, a valuer having not less than 5 years’ experience in valuing retail premises located in regional or sub-regional shopping centres; or for the purposes of a valuation relating to any other retail premises, a valuer having not less than 5 years’ experience in valuing retail premises[.] Within 14 days after a request by the specialist retail valuer, the landlord must supply the valuer with relevant information about leases for retail premises located in the same building or retail shopping centre to help the valuer determine the current market rent: s 37(4). The valuer must keep information supplied to them confidential, with some exceptions: s 38. A landlord’s failure to provide this information may result in a penalty of up to 50 penalty units: s 37(4). In addition, the specialist retail valuer may apply to the Victorian Civil and Administrative Tribunal (VCAT) under Pt 10 for an order that the landlord comply with the request: s 37(7)(b). The valuation must be in writing, contain detailed reasons for the valuer’s determination, and specify the matters the valuer considered in making the determination: s 37(6). The rent review provisions of the RLA are to apply on the renewal, after the commencement of the Act, to a pre-RLA lease: s 36. No specific controls are contained in the RLA in respect of the fixing of rent at the commencement of the term of the lease. However, reference should be made to the unconscionable conduct provisions of Pt 9, in particular ss 77(2)(e), (l) and (m) and 78(2)(e), (l) and (m). Decisions handed down by VCAT relating to the appointment of a specialist retail valuer include Victorian Education Foundation Ltd v Brislugan Pty Ltd (Retail Tenancies) VCAT 317; Higgins Nine Group Pty Ltd v Ladro Greville St Pty Ltd (Building and Property) VCAT 1687; and Di Dio Nominees Pty Ltd v JVR Enterprises (Vic) Pty Ltd (Building and Property) VCAT 772. 3.9 Outgoings and indemnities The landlord must provide a written estimate of the outgoings to which the tenant is liable to contribute under the lease, before entering into the lease and at least 1 month before the start of each accounting period: RLA s 46(2) and (3). The tenant is not liable to contribute to any outgoings until such an estimate is given: s 46(4). The landlord must also provide the tenant with a written statement of the details of all expenditure by the landlord, in each of the landlord’s accounting periods during the term of the lease, on account of the outgoings to which the tenant is liable to contribute: s 47. This statement must be made available to the tenant once during each accounting period, and the landlord is required to give the tenant an audited statement within 3 months after the end of each accounting period. The audited statement must show the total amount of outgoings and each individual outgoing that exceeds the prescribed percentage of the total (10%: Retail Leases Regulations 2023 (Vic) reg 11) and the auditor must give the tenant an opportunity to make a written submission in respect of the accuracy of the audited statement. An audit report need not accompany an outgoings statement if the statement does not relate to any outgoings other than: goods and services tax (GST); water, sewerage and drainage rates and charges; 14 © The College of Law Limited P305 Commercial Leases municipal council rates and charges; insurance; or any other outgoing of a kind prescribed by the regulations, and is accompanied by copies of assessments, invoices, receipts or other proof of payment for all expenditure by the landlord in the statement: s 47(6). The RLA prohibits the recovery by the landlord from the tenant of: capital costs under s 41, qualified by s 41(2)(a); depreciation: s 42; contributions to a sinking fund: s 43; interest on the landlord’s borrowings: s 44; land tax: s 50 (the application of this section is affected by s 121); and any undisclosed fit out costs: s 20. This does not apply to essential safety measures the tenant has agreed to carry out: s 41(2)(b). Management fees A provision in a lease is void where it requires a tenant to pay management fees, unless the fees relate only to the management of the building or retail shopping centre in which the premises are located and the amount of the fees and method of calculation are described in the lease or disclosure statement: RLA s 49. Advertising and promotion A provision in a retail premises lease is void to the extent that it requires the tenant to advertise or promote the tenant’s business except in respect of payments to the landlord for advertising or promotion costs incurred or to be incurred by the landlord: s 69. Where such payments are required to be made to the landlord, then at least 1 month before the start of each accounting period the landlord must make a marketing plan available to the tenant that gives details of the proposed expenditure on advertising and promotion during that accounting period: s 70(2). Additionally, if the tenant’s payment relates to an opening promotion, at least 1 month before that promotion the landlord must make available to the tenant details of the proposed expenditure: s 70(3). Any unspent advertising and promotion contributions must be carried forward for such future expenditure and adjusted at the end of the term of the lease: s 72. The landlord must prepare a written statement containing details of all expenditure by it in each accounting period during the term of the lease on account of advertising or promotion costs to which the tenant is required to contribute under the lease: s 71(2). The statement must: be prepared in accordance with applicable Australian accounting standards: s 71(4); be made available to the tenant at least once for expenditure during each of the landlord’s accounting periods during the term of the lease: s 71(3)(a); and be given to the tenant within 3 months after the end of the accounting period to which it relates, accompanied by a report prepared by a registered company auditor: s 71(3)(b) and (c). Liability for costs associated with the lease A landlord under a retail premises lease cannot claim from any person, including the tenant, the landlord’s legal or other expenses relating to the negotiation, preparation or execution of the lease, obtaining the consent of a mortgagee to the lease, or the landlord’s compliance with the RLA: s 51(1). © The College of Law Limited 15 THE COLLEGE OF LAW PROPERTY The prohibition on claiming costs in respect of the landlord’s compliance with the Act will, therefore, prevent a landlord seeking to recover from a tenant, or any other person, the landlord’s costs associated with the preparation of a disclosure statement or other documents required by the Act. The landlord may recover the reasonable legal or other expenses incurred in connection with an assignment of the lease or a sublease. These expenses can include investigating a proposed assignee or sub-tenant and obtaining any necessary consents to the assignment or sublease: s 51(2). Indemnities The RLA avoids indemnities by the tenant to the landlord for the landlord’s liability if the tenant would not otherwise be liable for or subject to the action: s 93. The landlord is required to indemnify the tenant for any amount recoverable from the tenant by a public statutory authority for charges, rates or taxes payable under any Act for the retail premises except for excess water charges or charges, rates or taxes for which the tenant is liable under the retail premises lease: s 93(3) and (4). Fire services property levy The fire services property levy is a levy on property owners payable from 1 July 2013. Disclosure statements for new leases must include an estimate of the amount of the fire services property levy for the relevant building or centre if it is intended that the tenant be required to contribute to or pay that levy. Essential safety measures Essential safety measures include smoke detectors, sprinkler systems, fire extinguishers, fire exit signs and annual safety inspections. Outgoings that may be paid by a tenant include, as defined in s 3, “the cost, or part of the cost, of repairs or maintenance work in respect of an essential safety measure”: RLA s 4(2). However, a landlord cannot recover costs they have already paid in relation to essential safety measures. The tenant may agree with the landlord to carry out, or cause to be carried out, repairs or maintenance work in respect of an essential safety measure on the landlord’s behalf: s 52(6). 3.10 Duration of a lease and options to renew Minimum term Section 21 of the RLA provides for a minimum 5-year term (which includes any further term(s) provided for by an option for the tenant to renew the lease) for all retail premises leases commencing on or after the commencement of the Act, except those where: the Commissioner certifies in writing that they, or a person acting on their behalf, have explained the effect of the provisions in s 21(1)–(4) to the tenant: s 21(5)(a)(i); and the tenant, after having been given such a certificate, gives a copy to the landlord: s 21(5)(a)(ii). Renewal Division 2 of RLA Pt 4 contains provisions on the renewal of retail premises leases. Where the lease contains an option to renew (refer to s 27), s 28(1A) provides that the landlord must, at least 3 months before the last date the option can be exercised, give the tenant written notice setting out: date by which the option may be exercised; rent payable for the first 12 months of the new term; availability of an early rent review (Retail Leases Amendment Act 2020 (Vic) s 13); availability of a cooling-off period; and any changes to the most recent disclosure statement. For notification of the last date for exercise of option to be effective, it must, in fact, be received by the tenant: Xiao v Perpetual Trustee Co Ltd VSC 412. 16 © The College of Law Limited P305 Commercial Leases Where no notice as to the last date for exercise of the option to renew the lease is given as required by s 28(1), the statutory extension resulting from the application of s 28(2) does not change the date of the commencement of the renewed term where the option is exercised after the expiry of the previous term: s 28(4). Where the lease provides for a market rent review, the tenant may request an early rent review by giving the landlord notice within 28 days after the landlord gives the tenant notice. If necessary, the tenant’s option period will then be extended until 14 days after the date that the reviewed market rent is determined. If a tenant has exercised an option to renew a retail lease, but has not requested an early rent review, the tenant may in certain circumstances have the benefit of a 14-day cooling-off period after the rent review is finalised. In respect of the renewal of a lease under the RTA, the RTRA or the RLA, the landlord must give to the tenant a disclosure statement at least 21 days before the end of the lease whenever: a tenant has exercised an option to renew the lease; a tenant is entitled to exercise an option to renew the lease; or there is an agreement to renew the lease: RLA s 26. The form of disclosure statement is the same as for a new lease. A similar process as for new leases for the notification by the tenant of the non-receipt of a disclosure statement enables the tenant to exercise the rights given for the failure to provide a disclosure statement. A tenant may, no later than 90 days after the lease is renewed, give the landlord a written notice that the landlord has not given the tenant a disclosure statement: s 26(3). If such a notice is given: the tenant may withhold payment of the rent until the day on which a disclosure statement is given; the tenant is not liable to pay rent for the period from and including the day on which the notice was given until and including the day on which the disclosure statement is given; and the tenant may give the landlord written notice of termination at any time before 7 days after the disclosure statement is given: s 26(4). If any information contained in the disclosure statement is misleading, false or materially incomplete, the tenant may give the landlord written notice of termination at any time before the end of 28 days after the later of the date the lease is renewed, or the tenant is given the disclosure statement: s 26(5). Note also the provisions in s 64(2)(b), which require that the landlord must, at least 6 months but not more than 12 months before the lease term ends, give written notice to the tenant if they do not propose to offer the tenant a renewal of lease. 3.11 Protection of tenant’s possession and other rights Section 54 of the RLA provides the tenant with a right to compensation for interference. The tenant is not required to provide the landlord with a notice to rectify before being entitled to claim damages. The tenant is only required to give the landlord a written notice of the loss or damage suffered as soon as practicable after it is suffered, and the failure to give such a notice does not affect any right of the tenant to compensation: s 54(3). 3.12 Assignment and subletting There are no controls upon a landlord in respect of subletting. In respect of assignment, RLA s 60 provides that a landlord is only entitled to withhold its consent to the assignment if one or more of the following applies: (a) (b) the proposed assignee proposes to use the retail premises in a way that is not permitted under the lease; the landlord considers that the proposed assignee does not have sufficient financial resources or business experience to meet the obligations under the lease; © The College of Law Limited 17 THE COLLEGE OF LAW PROPERTY (c) (d) the proposed assignor has not complied with reasonable assignment provisions of the lease; the assignment is in connection with a lease of retail premises that will continue to be used for the carrying on of an ongoing business and the proposed assignor has not provided the proposed assignee with business records for the previous 3 years or such shorter period as the proposed assignor has carried on business at the retail premises. Before requesting the landlord’s consent to an assignment, the tenant must give to the proposed assignee: a copy of any disclosure statement given to the tenant concerning the lease; and an update of the details contained in the disclosure statement: s 61(3). If the assignment is in connection with the lease of a retail premises that will continue to be used for the carrying on of an ongoing business, the tenant must also give to both the landlord and the proposed assignee a disclosure statement in the form prescribed by the regulations: s 61(5A). Satisfying this requirement will release the tenant and any guarantor or covenantor of the lease from: any obligations under the lease; or any liability to pay the landlord any money in respect of amounts payable by the proposed assignee, as from the date of the assignment of the lease, provided that the information given in the disclosure statement is not false, misleading or materially incomplete: s 62. An assignment of a retail premises lease is to be taken to be a continuation of the lease and not an entry into a new lease: s 8. Some of the more important decisions handed down by VCAT on the assignment of a retail lease include AVC Operations Pty Ltd v Teley Pty Ltd (Building and Property) VCAT 931; HJ Corporation Pty Ltd v Nguyen (Building and Property) VCAT 1300; and Villa v Emaan Pty Ltd (Retail Tenancies) VCAT 274. 3.13 Landlord’s obligation to repair Section 52 of the RLA requires the landlord to maintain, in the condition consistent with the condition of the premises when the retail premises lease was entered into: structure of the premises; fixtures in the premises; plant and equipment at the premises; and appliances, fittings or fixtures provided under the lease by the landlord relating to gas, electricity, water, drainage or other services. The landlord’s obligation does not extend to where the need for the repair has arisen out of misuse by the tenant or where the tenant is entitled or required to remove the item requiring maintenance at the end of the lease: s 52(3). Where the landlord is entitled to require the tenant to remove the item at the end of the lease, the landlord will be responsible for maintenance as the tenant does not have a clear entitlement to remove the item at the end of the lease. Urgent repairs A tenant may arrange for urgent repairs, for which the landlord is responsible under the terms of the lease or by virtue of the application of the provisions of RLA s 52, to be carried out if: the repairs are necessary to fix or remedy a fault or damage that has or causes a substantial effect on or to the tenant’s business at the premises; and the tenant is unable to get the landlord or the landlord’s agent to carry out the repairs despite having taken reasonable steps to arrange for the landlord or agent to do so: s 52(4). 18 © The College of Law Limited P305 Commercial Leases If the tenant carries out the repairs: the tenant must, within 14 days after the repairs have been carried out, give the landlord a written notice of the repairs and the costs; and the landlord is liable to reimburse the tenant for the reasonable cost of the repairs: s 52(5). Decisions handed down by VCAT and the Supreme Court of Victoria on how the landlord’s liability for repairs (s 52) is applied include Bretair Pty Ltd (No 2) (Retail Tenancies) VCAT 1808; Versus (Aus) Pty Ltd v A.N.H. Nominees Pty Ltd VSC 515; and Anchong Nominees Pty Ltd v Rafei (Building and Property) VCAT 1313. 3.14 Refurbishment and relocation, demolition and damage The RLA contains extensive provisions dealing with interruption to the tenant’s enjoyment of the premises including: alterations and refurbishments: ss 53 and 58; demolition: s 56; damage to the premises: s 57; and relocation: s 55. 3.15 Fit outs Unless the liability to do so is specified in a disclosure statement provided by the landlord, a provision in the retail premises lease requiring the tenant to pay or contribute to the cost of the fit out of the premises is void: RLA s 58. Otherwise, s 30 regulates contributions required of a tenant in respect of works associated with or alterations to the premises in a retail shopping centre to enable them to be fitted out. A tenant is not required to pay rent or outgoings until the landlord has substantially complied with its obligations to provide some or all of the fit out before the tenant enters into possession: s 31. A provision in a retail premises lease limiting the tenant’s rights to employ or engage persons of their own choosing is void (s 59), although the lease can: provide minimum standards of competence and behaviour for persons employed or contractors engaged; prohibit work from being carried out on specified items of the landlord’s property; or if the premises are in a retail shopping centre, require the tenant to comply with any relevant award or agreement: s 59(2). 3.16 Additional requirements for leases of retail shopping centres Section 3 of the RLA defines “retail shopping centre” as a cluster of premises whereby: at least five of the premises are retail; all premises are owned by the same person or have the same landlord or the same head landlord; the premises are located: – in a single building; or – in two or more buildings that are adjoining, separated only by common areas or separated only by road; and the cluster of premises is promoted as, or generally regarded as constituting, a shopping centre, shopping mall, shopping court or shopping arcade. The provisions of RLA Pt 8 apply to retail shopping centres only: changes to core trading hours: s 66; confidentiality of turnover information: s 67; access to statistical information: s 68; © The College of Law Limited 19 THE COLLEGE OF LAW PROPERTY marketing/promotion: ss 69–72; avoidance of any provision allowing a landlord to terminate for inadequate sales: s 73; avoidance of any provision that imposes geographical restraints in respect of the conduct of the tenant’s business either during the term of the lease or after the end of the term: s 74; and tenants’ associations: s 75. 3.17 Unconscionable conduct The provisions relating to unconscionable conduct in RLA Pt 9 apply to conduct under existing leases which would have been subject to the Act had they been entered into after the commencement of the Act: s 76. Sections 77 and 78 set out the unconscionable conduct provisions applicable to the conduct of landlords and tenants. Conduct will not by itself be unconscionable if: the person institutes proceedings in relation to the lease or refers a dispute, application or claim relating to the lease to arbitration, conciliation, mediation or some other form of alternative dispute resolution; the person fails to renew the lease or enter into a new lease; or the person does not agree to having an independent valuation of current market rent carried out: s 79. Damages may be recovered in VCAT, and a claim must be lodged within 6 years of the unconscionable conduct occurring: s 80. 3.18 Other provisions of the Retail Leases Act The RLA also deals with: void provisions: s 94; the service of documents; s 97; the limitation of the Supreme Court’s jurisdiction: s 98; and regulations under the Act: s 99. Where a premises is used both for residential and retail use and, as a result, the Residential Tenancies Act 1997 (Vic) does not apply to the lease, then the retail premises lease is taken to provide that the landlord must ensure that the residential area is maintained in good repair: s 95. 3.19 Disputes The Commissioner’s role is to “enhance a competitive and fair operating environment for small business in Victoria”: Small Business Commissioner Act 2003 (Vic) s 1. The Commissioner’s powers and functions are wide: RLA s 84; Small Business Commissioner Act 2003 (Vic) s 5. In particular, reference should be made to the Commissioner’s role in respect to dispute resolution. A retail tenancy dispute (other than one in which an injunction is sought) may only be referred to VCAT if the Commissioner has certified in writing that mediation or another appropriate form of alternative dispute resolution has failed or is unlikely to resolve the dispute: RLA s 87(1) and (2). The effect of these provisions is that in respect of a retail tenancy dispute that is required to be referred to VCAT, the parties must first refer the matter to the Commissioner. The office of the Commissioner arranges alternative dispute resolution or otherwise certifies that alternative dispute resolution is not appropriate. The Commissioner will, therefore, be the first contact point in respect of any retail tenancy dispute before any action can be taken through VCAT. A retail tenancy dispute includes a dispute arising under a lease subject to the RTA or the RTRA or that would have been subject to the RLA had it been entered into after 20 © The College of Law Limited P305 Commercial Leases the commencement of the RLA: s 81. This definition excludes a dispute solely relating to the payment of rent: s 81(2). The notice of dispute form is on the Victorian Small Business Commission website. The RLA extends VCAT’s powers to deal with retail tenancy disputes by including a power to grant relief against forfeiture: s 89(2). Each party to a retail tenancy dispute bears its own costs in VCAT unless the tribunal is satisfied that it is fair to order costs in a proceeding because: the party conducted the proceeding in a vexatious way that unnecessarily disadvantaged the other party; or the party refused to take part in or withdrew from alternative dispute resolution: s 92(2). 4 AGREEMENT FOR RETAIL LEASE 4.1 Need for agreement Where it is not possible for the parties to enter into a lease, an agreement for lease may be executed. For example: the landlord is purchasing the property or acquiring an interest as head landlord and has not yet acquired title; the building or the premises have not yet been fully erected or refurbished or are not ready for immediate occupation; the premises are occupied by an existing tenant; or entry into the lease depends upon a number of factors that have not been fulfilled, such as development, building or subdivision approval, building subdivision or consolidation of title. As “lease” includes an agreement for lease, the procedures applicable to and provisions of the RLA will apply equally to agreements for lease. An alternative to an agreement for lease may be a conditional lease in the same terms as a lease provided that it is subject to the performance of certain conditions, such as the completion of building works or the acquisition of planning permits. It is sometimes a preference of parties that only one document, namely the lease, be entered into, but the difficulties of ensuring compliance with the conditions for operation of the lease need to be fully appreciated. The form of agreement for lease usually adopted is an agreement to which a form of lease is attached completed in all respects except for those terms that are still to be determined, such as the commencement date. 4.2 Formal requirements Pursuant to Instruments Act 1958 (Vic) s 126, an agreement for lease requires: concluded agreement on essential terms of the agreement, such as the parties, leased premises, rent, term and main lease terms; and an adequate written note or memorandum of the agreement. This is usually satisfied by a written agreement for lease, which may be in the form of a deed, with the agreed form of lease attached. If the lease is to be guaranteed, it is prudent for the agreement also to be (separately) guaranteed, to cover breaches or repudiation of the agreement. The guarantor should be a party to the agreement and execute it. If the agreement for lease is governed by the RLA, the procedures applicable to transactions subject to that Act must be adhered to, including: © The College of Law Limited 21 THE COLLEGE OF LAW PROPERTY 4.3 pre-agreement disclosure requirements; requirements regarding notification to the Commissioner of the agreement for lease; 5-year minimum term provisions; and dispute resolution provisions. Conveyancing procedures The conveyancing procedures in relation to agreements for lease are set out below: 1. The landlord’s lawyer should prepare and submit a draft agreement for lease, with draft lease attached. Where the agreement for lease is subject to the RLA, a complete copy of the agreement for lease (except the particulars of the tenant, the rent and the term of the proposed lease) and a copy of the information brochure prepared by the Commissioner must be provided as soon as negotiations commence: s 15. The effect of this is to require the documentation to be prepared in all respects (except particulars of the tenant, the rent and the term) before negotiations commence with a prospective tenant. 2. All pre-contract enquiries should be completed and found satisfactory before the agreement is entered into. Similarly, the terms and conditions of the lease should be negotiated, fully settled and found to be satisfactory before the agreement is entered into. The point is that once the agreement is entered into the tenant will be obliged to proceed to enter into the lease if the conditions of the agreement are met, and it will usually be too late to object to matters that might arise from enquiries after the agreement is entered into. 3. Except in respect of agreements for lease subject to the RLA, arrangements relating to costs must be finalised before the agreement is entered into and should cover the agreement and the lease and be incorporated into the agreement. 4. After negotiations for amendments, and searches and enquiries have been made by the tenant’s lawyer, the landlord’s lawyer prepares the finally agreed document for execution. Where the agreement for lease is subject to the RLA, once the terms of the agreement have been finalised a disclosure statement should be provided in accordance with the requirements of s 17. 5. It is preferable to have both copies of the agreement for lease executed by each of the parties. That will require two copies to be submitted to and signed by the tenant and then by the landlord, each party to receive a fully executed copy. Alternatively, each party signs a copy, and the signed copies are exchanged. An extra copy will be required where there is a guarantor to the agreement for lease. 6. Where acting for the tenant, it is prudent to lodge a caveat on the landlord’s title, where the tenant is not in possession of the premises, as is frequently the case where an agreement for lease is entered into and further matters are required to be carried out before the lease is entered into and the tenant takes possession pursuant to the lease. The protection provided by TLA s 42(2)(e) applies to agreements for leases; however, it is only provided in respect of a tenant in possession of the land, and with most agreements for lease, possession of the land is not taken until the matters dealt with in the agreement are fulfilled. 7. In some circumstances, duty may be payable on the agreement for lease or the lease. 8. If the lease is to be registered, it should be made clear in the agreement for lease or in the attached lease that the lease is to be registered and an obligation should be placed on the landlord to attend to registration. It is prudent to secure the mortgagee’s consent to the lease before the agreement is entered into, otherwise the entire arrangement may turn out to be ineffective against the mortgagee. 9. It is prudent, while the agreement is subject to conditions that have not been fulfilled: for the tenant not to move into occupation; and for the tenant not to incur expenditure in renovating or fitting out the premises. 22 © The College of Law Limited P305 Commercial Leases The lawyers for the landlord and for the tenant should provide cautionary advice to their respective clients regarding these matters. 5 FORMAL REQUIREMENTS OF LEASES 5.1 Overview The formal requirements of leases cover: capacity of the landlord to grant or the tenant to take the lease; whether the lease should be in the form of a deed; whether the lease should be registered; whether approval is required under the Foreign Acquisitions and Takeovers Act 1975 (Cth); and obtaining the mortgagee’s consent. 5.2 Capacity The more important capacity issues relate to: title to the land – whether the land is in the proposed landlord’s name; legal disability – whether any of the parties suffer from a legal disability, such as being under the age of 18 years, mental incapacity, duress bankruptcy, insolvency or property vesting in a third party; whether a party needs to have the power conferred by statute generally or specifically to grant (or accept) the intended lease (and options for renewal) or needs the consent of, for example, a Minister of the Crown; liquidators – when granting a lease, they have very limited leasing powers, and the intended lease may require the approval of the Supreme Court; and legal personal representatives and trustees – they do not have unlimited leasing powers and these depend on powers contained in the will, trust instrument and statute (Trustee Act 1958 (Vic)), which may restrict the duration of the lease or the ability to grant an option for renewal. 5.3 Deed A lease should be in the form of a deed in order to create or pass a legal interest: PLA s 52(1). However, a deed is not required where: a lease is not required by law to be in writing: s 52(2)(d) (see s 54(2) for where a lease can be created orally or in writing other than by deed); or a lease of land under the TLA is for a term of more than 3 years and is registered under that Act. 5.4 Registered or unregistered lease Leases may be registered if the term granted by the lease is for more than 3 years: TLA s 66(1). However, it is the practice not to register leases because of the protection provided to tenants by s 42, which provides that the registered proprietor of any land under the Act shall hold such land subject only to the interest of a tenant in possession of the land. Where a tenant is not in possession of the land, it is desirable that the lease be prepared in a form suitable to be registered (s 66(1)) and registered or, at least, a caveat lodged on the tenant’s behalf. 5.5 Foreign acquisition In some lease transactions, Foreign Investment Review Board (FIRB) approval is required under the Foreign Acquisitions and Takeovers Act 1975 (Cth). Approval may be required when the lease is of © The College of Law Limited 23 THE COLLEGE OF LAW PROPERTY Australian urban land (land that is not used wholly and exclusively for carrying on a business of primary production) and the tenant is a foreign person under that legislation. Note, particularly, Foreign Acquisitions and Takeovers Act 1975 (Cth) s 12(1) on interests in Australian urban land and the exemptions under Foreign Acquisitions and Takeovers Regulation 2015 (Cth) Pt 3. Approval is not required unless the term of the lease and any option for renewal, added together, exceeds 5 years: s 12(1)(c). However, even if the period exceeds 5 years, approval is not required if an exemption under Foreign Acquisitions and Takeovers Regulation 2015 (Cth) Pt 3 applies. Each party’s lawyer must be careful to ascertain whether approval to a lease is required under this legislation. If approval is required, application should be made to the FIRB. If a required approval is not obtained, the Treasurer can prohibit the transaction or order disposal of the lease by the tenant. 5.6 Mortgagee’s consent A mortgagee, in exercising a power of sale, transfers to a purchaser a title free of any encumbrance apart from, among other things, a lease to which the mortgagee has consented in writing or to which the mortgagee is a party: TLA s 77(4)(a). As a result, in order for a landlord to provide a good title to a tenant where there is a mortgage over the land, and the mortgage has been entered into before the lease, the mortgagee must provide its written consent to the lease. If written consent is not provided and there is no evidence of such consent, the mortgagee may evict the tenant in spite of the provisions of the lease and sell the land with vacant possession. Therefore, before the lease or agreement for lease is entered into, the mortgagee’s consent to the lease should be fully established. If there is at least a binding informal consent by the mortgagee, the formal consent may be executed subsequently. However, frequently mortgagees require formal documents to be executed relating to the consent. Those requirements and documentation should be clarified before the lease is entered into. It is undesirable for the tenant to move into occupation or incur expenditure on the premises before the mortgagee’s consent to the lease is obtained, at least informally. For leases subject to the RLA, the landlord is not able to claim from any person the landlord’s legal or other expenses relating to obtaining the consent of a mortgagee to the lease: s 51(1)(b). 6 LEASE COSTS AND DISBURSEMENTS 6.1 Apportionment of liability for costs A common issue in respect of agreements for lease and leases not subject to the RLA is the payment of the landlord’s legal costs in respect of the negotiation, preparation and execution of the documentation executed by the parties. In recent years, there has been a move towards each party bearing its own costs for the transaction. This topic may be appropriate for negotiations before the lease is executed, including when premises are difficult to lease and the tenant can secure some concessions regarding costs, such as that the landlord should bear its lawyer’s costs of preparation of the lease. The costs arrangements should be specified in the document. Each of the following matters needs to be covered: which party should be responsible for the costs of preparation of the lease or agreement for lease, and if both, in what proportions; should each party pay its own legal costs; and who should be liable for the costs of: – lease negotiations involving the parties’ lawyers; – lease drafting, to settle the final terms of the documents; – subsequent default by the tenant; and any consents to the lease (including consents of a head landlord and mortgagees) or for any – consents subsequently required? 24 © The College of Law Limited P305 Commercial Leases For precedents of a comprehensive lease provision relating to costs, see CCH Australia Limited, Lang’s Commercial Leasing in Australia (looseleaf and online) and LexisNexis, Australian Encyclopaedia of Forms and Precedents (looseleaf and online). In respect of agreements for lease or leases subject to the RLA, see s 51. 6.2 Bill for costs and estimated disbursements In costing lease matters, lawyers must always comply with their professional obligations, including compliance with the costs disclosure requirements under Legal Profession Uniform Law (Legal Profession Uniform Law Application Act 2014 (Vic) Sch 1) Pt 4.3. The costing of leases is regulated by the scale costs in Law Institute of Victoria, Practitioner Remuneration Order (1 January 2023) Third Schedule, made under Legal Profession Uniform Law Application Act 2014 (Vic) s 94 (see also s 172). The Third Schedule lists the costs, based on the total rent for the period of the lease, in acting for a landlord or a tenant and also provides that, where the lease is under the RLA, additional legal costs in connection with the disclosure statement under RLA s 17 are chargeable in accordance with the First Schedule of the Order. However, a lawyer can elect to cost a lease matter under the itemised scale in the First Schedule instead of the Third Schedule where that lawyer has given written notification to the client and any third party liable to pay the client’s costs within 14 days of undertaking the matter that it will be costed under the First Schedule: Practitioner Remuneration Order cl 8. Under the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (GST Act), there are two transactions relevant to the treatment of solicitors’ costs for the preparation of commercial leases: supply 1: supply of legal services from the lawyer to the lessor; and supply 2: supply of the premises from the lessor to the lessee. Under the terms of a standard commercial lease, the lessee is responsible for reimbursing the lessor any costs incurred in the execution of the lease. The current procedure under the GST Act allows the lessor and the lessee to claim input tax credits as the tax invoices will follow in the same direction as the taxable supplies. In a letter from the Australian Taxation Office, dated 15 January 2001, to the President of the Law Society of New South Wales (that also refers to lessors and lessees), it was pointed out: The A New Tax System (Goods and Services Tax) Act 1999 (the GST Act) does not allow for an entity other than the supplier, or agent of the supplier where the supply is made through the agent, to issue a tax invoice on behalf of the supplier. There are two supplies in the scenario provided. The first supply is the supply of legal advice by the solicitor to the lessor. The second supply is the supply of premises by the lessor to the lessee. There is no provision in the GST Act for the two supplies to be treated as though they are one supply, or for one of the supplies to be ignored. If the lessor’s solicitor supplies the premises as agent of the lessor, the solicitor is entitled to issue a tax invoice in relation to that supply. The bill passed on to the tenant should cover only the costs and disbursements for which the tenant is liable – which involves examining the lease and any statutory restrictions. For leases subject to the RLA, the landlord cannot charge the tenant for its costs in respect of the lease: s 51. 6.3 Duty Section 7(1)(b) of the Duties Act 2000 (Vic) is directed at ensuring certain leasing arrangements over land in Victoria (by which a lease is used to effectively transfer rights in the underlying land and/or the economic benefits of the land) are not used as a mechanism for avoiding duty. This section lists the transactions for which duty is charged. © The College of Law Limited 25 THE COLLEGE OF LAW PROPERTY Duty is chargeable on the granting of any lease where consideration other than rent reserved is paid or agreed to be paid, under the lease: s 7(1)(b)(v). Accordingly, a premium for the grant of a lease would attract duty. The lease is dutiable if the consideration, other than rent reserved, is paid in respect of either the grant of the lease, or any of the events listed in s 7(1)(b)(v)(A)–(D). Similarly, duty will be payable on any transfer or assignment of a lease for which any consideration is paid or agreed to be paid, or in respect of certain other rights or interests relating to the leased land, set out at s 7(1)(b)(va)(A)–(D). Legal Practitioners’ Liability Committee, Duties Amendment Act 2009 Bulletin (August 2009) includes the following advice for lawyers when handling a lease transaction (including assignment and transfers): … carefully assess whether there is any consideration being offered other than rent reserved and if so advise the client of the possible broad interpretation of the new amendments. Clients should be advised that: If there is any concern about whether duty will be payable they should seek a private ruling from the State Revenue Office and then ensure that the instrument is stamped accordingly. The risk of not having the lease properly stamped include: – being unable to have the lease registered on title; and – being unable to have the lease produced in court as evidence in the event of a dispute between landlord and tenant (or with any other party); and – having to pay penalty tax and interest if stamped late. State Revenue Office rulings provide limited certainty but are not binding on the SRO. As such, rulings have no status before a court: it is the correct interpretation of the legislation which will be decisive if a dispute goes to court. 7 DRAFTING AND NEGOTIATING COMMERCIAL LEASES 7.1 Significance of lease for parties For landlords, a commercial property is an investment, and the gross and net return on the property is relevant for its success as an investment. For landlords, secure and successful tenants, under long-term leases, render management of the property easier and enable the property to be sold or mortgaged more easily when required. For tenants, the lease is an asset that is an integral part of their business. The obtaining of a sufficiently lengthy and satisfactory lease is relevant for the tenant’s ability to continue to trade in the premises and to sell the business in the future. It should be appreciated that: the drafting and negotiating of commercial leases is a sophisticated task and a few words in some lease provisions can have major practical and financial consequences; frequently the cost of the goodwill acquired (or purchased) and the costs of establishment (fitting out, removal costs) are comparable to the cost of purchasing a domestic residence; and the adequacy of the lease terms becomes magnified in importance when the tenant wishes to sell its business or to assign the lease. 7.2 Role of the landlord’s lawyer The landlord’s lawyer’s principal role in a commercial lease transaction is to: carry out searches of the landlord’s title, the landlord and the tenant; where the lease is subject to the RLA, prepare a draft relevant disclosure statement for completion and signing by the landlord; forward relevant lease documentation to the tenant or the tenant’s lawyer; 26 © The College of Law Limited P305 Commercial Leases attend promptly to any queries or requests for amendment by the tenant’s lawyer; and have the lease or agreement for lease finalised and executed as quickly as possible. When preparing leases, or copies for execution, the landlord’s lawyer must be careful to ensure that: the agreed amendments are all incorporated accurately in the lease; the lease does not contain errors or omissions due to computer error; when leases in the building are required to include a particular provision because uniformity is required, the provision is included in each lease; and if it is intended to prohibit the use of premises for a competing use by one or more tenants, because of an arrangement with one of the tenants, this prohibition is inserted in all other leases. 7.3 Role of the tenant’s lawyer The tenant’s lawyer’s primary function when receiving instructions and lease documentation is to carry out searches of the property and of the landlord to ensure that everything is satisfactory from the tenant’s point of view. If the premises are subject to a mortgage, the tenant’s lawyer must request the landlord’s lawyer to provide the mortgagee’s consent to the lease. Generally, searches and enquiries, including planning searches, should be made as if the property was being purchased, unless the client instructs that the searches be more limited. The tenant’s lawyer should ensure that the lease, as finally settled, correctly represents the parties’ agreement and adequately protects the tenant. Failure by the tenant’s lawyer to negotiate sufficiently vigorously on their clients’ behalf to secure the most favourable lease arrangements and covenants is not in the tenant client’s best interests. There is no reason why the tenant’s lawyer, when properly instructed, should not seek to renegotiate and secure, for example, better lease terms, a longer lease, or additional options to renew. The tenant’s lawyer might also consider getting permission for their client to display advertising signage at the property and documenting the condition of the property with respect to structural soundness and being watertight at the start of the lease (noting RLA s 52 and the landlord’s repair obligations). The tenant’s lawyer also has an important obligation to explain the lease provisions adequately to the client. This does not necessarily require a detailed explanation of every lease provision, but, with the lawyer’s exercise of reasonable professional judgement, includes those aspects that are important for the client or are unusual lease provisions. 7.4 More important lease provisions The more significant topics on which lawyers need to obtain instructions are: subject matter of the lease, including the premises covered by the lease, rights of access, use of additional amenities, parking, common portions of the building and common services; term of the lease; existence of any option for renewal, including its terms, that it binds successors and assigns to the landlord and the tenant, the basis of fixing rent during the option period; rent and rent reviews; entitlement to affix and to remove fixtures, and remediation and refurbishment at the end of the term; entitlement to assign or sublet, and the conditions of that entitlement; obligations involving the doing of work or the expenditure of money by either party, including to pay rates and insurance, and to repair and maintain the premises; restrictions on permitted use, and ability to change permitted use; © The College of Law Limited 27 THE COLLEGE OF LAW PROPERTY 7.5 provisions (if any) entitling the landlord to terminate the lease for any reason or to relocate the tenant to another part of the building; and whether there is any consideration being offered other than rent reserved. Disclosure as to building energy efficiency Most corporate landlords and head tenants of office buildings with a net lettable area of 1,000m2 or more since 1 July 2015, must comply with the disclosure obligations imposed by the Building Energy Efficiency Disclosure Act 2010 (Cth) (BEEDA). The Commercial Building Disclosure (CBD) program requires the landlord or head tenant to obtain and register a building energy efficiency certificate (BEEC) when leasing or subleasing the building or part thereof: BEEDA s 11. The BEEC is publicly accessible from the online Building Energy Efficiency Register: BEEDA s 14. The energy efficiency rating for the building must also be included in any advertising material for the lease or sublease of the building, except where the proposed lease term is 12 months or less: BEEDA s 15. The rating must be displayed prominently within an advertisement so that it is clearly visible, not obscured and at least as large as the majority of the text in the advertisement: Building Energy Efficiency Disclosure Determination 2016 (Cth) s 5(2). The criteria for a disclosure affected building or area of the building are: at least 75% of the net lettable area is for administrative, clerical, professional or similar information-based activities, including any support facilities for those activities; and the net lettable area for those activities, including any support facilities, is at least 1,000m2: Building Energy Efficiency Disclosure (Disclosure Affected Buildings) Determination 2016 (Cth) s 5. The BEEDA only applies to buildings or areas of buildings used for office activities. However, there is flexibility for the government to extend or amend the scope of the CBD program in the future. There are exemptions from the CBD obligations for: new buildings or buildings that have had a major refurbishment, where there is a certificate of occupancy less than 2 years old; strata-titled buildings; short-term leases, that is, for a period of less than 12 months (including any option to extend); and leases by exercise of an option to renew, or an extension of an existing lease. An example BEEC is available at the Commercial Building Disclosure Program website. 7.6 Parties to a commercial lease Strictly, the parties to a commercial lease are the landlord and the tenant. However, most commercial leases need to, and do, cover a much wider range of parties who have an interest in the lease, such as: successors of the landlord, including purchasers of the building and legal personal representatives of the landlord; successors of the tenant, including assignees of the lease, legal personal representatives of the tenant and the trustee or liquidator of an insolvent tenant; guarantors, usually of the tenant’s obligations under the lease; mortgagees over the property, whose consent is usually required to the lease and who may assume the landlord’s role after the landlord’s default under the mortgage; mortgagees over the lease, who have advanced money to the tenant on the security of the lease and may assume the position of the tenant after the tenant’s default under the mortgage; and sub-tenants, because of restrictions on subletting in the lease, the consequences of default under the lease on sub-tenants, and the obligation of sub-tenants not to breach the lease obligations under the head lease. 28 © The College of Law Limited P305 Commercial Leases 7.7 Drafting a lease Some important considerations relating to the drafting of commercial leases are set out below: There are some covenants implied by TLA s 67. However, these are rarely used as they are not sufficiently detailed and their content does not reflect current leasing conditions and practice. It is preferable to rely on express lease covenants relating to each topic covered in the lease. There is very little room for the implication of terms in a commercial lease. The lease should cover in express terms, and in sufficient detail, every topic. Landlords’ lawyers should attempt to use lease documents that are not unduly lengthy and complex. However, the documents need to cover adequately the rights and obligations of each party, and the length and complexity is governed by the nature and size of the transaction. A lease transaction will be finalised more rapidly and satisfactorily if relatively plain and comprehensible language is used, and the document is organised into sections covering separate topics. The provision of lease provisions which are not wholly biased towards the landlord but that are fair and reasonable to both parties and also provide adequate protection for the tenant, should be encouraged. If a standard form of lease is used, such as the Law Institute of Victoria commercial lease (LIV commercial lease), note that: the standard lease will contain provisions commonly found in commercial leases, whether the RLA applies to the lease or not; the standard lease will need to be considered and, as appropriate, amended to consider specific client requirements and, where relevant, the provisions of the RLA; and many of the matters referred to in this practice paper will be covered by specific provisions in a standard lease and reference should be made to the LIV commercial lease to note how that matter is covered in that standard form. 7.8 Submitting draft lease In relation to the landlord’s lawyer submitting a draft lease or agreement for lease, the draft should: accurately represent the landlord’s instructions; be submitted as soon as possible after the lawyer receives instructions to act; and make it clear that neither party is bound until execution of the finalised document by both parties. It is usually unnecessary to deal with this aspect when sending a draft, but it will clarify the position if the letter from the landlord’s lawyer includes a statement such as: This draft is submitted on the basis that neither party is bound and each may withdraw from negotiations, until the final terms of the lease [or agreement for lease] have been agreed on and the lease has been executed by both parties. 7.9 Negotiations After a draft lease or agreement has been submitted, the main objectives of the discussions and correspondence between the parties’ lawyers should be to: ensure that the draft, as altered, covers the parties’ agreement; ensure that foreseeable problems or matters are covered adequately and fairly in the interests of each party; and negotiate some matters (because that has not occurred) or to renegotiate some matters (to remove some potential problem or an unfair provision). © The College of Law Limited 29 THE COLLEGE OF LAW PROPERTY If the matters at issue cannot be resolved rapidly after some initial correspondence, a conference should be held between the lawyers and representatives of the client with authority to negotiate and reach binding decisions. 7.10 Suggested leasing practice The following recommendations on the manner in which lease transactions should be conducted between lawyers were made by the Council of the Law Society of New South Wales in the Law Society Journal (November 1989): (1) (2) (3) (4) (5) (6) (7) The original and required number of copies of the draft lease be submitted to the lessee or the lessee’s solicitor for approval. A complete copy of the draft lease be retained for execution by the lessor. Any amendments be agreed upon and incorporated in all copies. The lessee executes the original and all submitted copies of the settled lease, and the lessor executes another copy. The lessee’s solicitor delivers to the lessor’s solicitor the original and all submitted copies of the settled lease, duly executed by the lessee with payment for proper costs, disbursements and any other agreed payments in exchange for a counterpart copy (which need not be in registrable form) executed by the lessor. The lessor’s solicitor promptly seeks to obtain execution by the lessor of all the lease documents which have been delivered to the lessor’s solicitor. The lessor’s solicitor should advise the lessee’s solicitor when the documents have been executed, or of any delay in obtaining execution. Where registration of the lease is required by either party, it is the obligation of the solicitor acting for the party having the carriage of the stamping, registration and obtaining the consent of any necessary consenting party, to seek to attend to all such matters with due expedition. These recommendations reflect prudent conveyancing practice in Victoria. Note, however, for Victoria: the lease transactions for which duty will be payable; the different practice on registration of leases; and the different terminology of landlord and tenant. In addition to the above recommendations, two other matters are recommended: the lease (or agreement for lease) should contain, if registration is required, an undertaking by the landlord to register the lease within a specified reasonable time, allowing sufficient time for registration and endorsement (or execution) of the mortgagee’s formal consent; and either the formal, or at least the informal (but binding), consent of each mortgagee should be obtained before the tenant enters into possession or expends any money with reference to the premises. Whether acting for landlord or tenant, it is also recommended that you refer to the Legal Practitioner’s Liability Committee Practice Risk Guide Looking After Leases (October 2020), available on the Legal Practitioner’s Liability Committee website. 7.11 Separate representation of parties Generally, the same lawyer should not act for the landlord and the tenant in a commercial lease transaction. The parties have an inherent and actual conflict of interest and require separate and independent representation and advice. The conflict is not always apparent, but it does exist. 30 © The College of Law Limited P305 Commercial Leases 8 ACTING FOR THE LANDLORD 8.1 When the Retail Leases Act applies If the lease is governed by the RLA, the principal requirements when acting for a landlord are: (a) a draft lease should have been prepared before offering the premises for lease; (b) a landlord’s disclosure statement should be prepared; (c) the prospective tenant, when negotiating to lease premises, should be given a copy of the proposed lease and the information brochure published by the Small Business Commission: s 15; (d) at least seven days before entering into the lease the tenant must be provided with a disclosure statement reflecting the terms of the lease as negotiated together with a copy of the proposed lease as negotiated in writing: s 17; (e) the tenant should give a signed acknowledgment for having received those documents; (f) the lease should not be entered into until at least seven days after the tenant receives the landlord’s disclosure statement; (g) within 28 days, or such other period agreed in writing, after being given a copy of the lease signed by the tenant, the landlord must give the tenant a copy (which may be a photocopy) of the lease signed by the landlord and the tenant: s 22; and (h) where the lease is for less than the statutory minimum 5-year term provided by s 21 the documentation for the purpose of obtaining an exemption from that provision as required by s 21 needs to be completed and provided to the tenant. 8.2 Obtaining instructions for preparation of lease See Appendix 1 for the steps involved when acting for a landlord in a commercial lease. When a leasing agent is involved, usually the leasing agent provides details of the transaction, indicating the main particulars. Otherwise, the landlord provides those details when instructing the lawyer to prepare the lease. When the lease is for a premises in a shopping centre or large commercial building, usually there is an established form of lease used for that building and only the particulars need to be completed. However, when there is no such lease, or in smaller buildings, or when the lawyer acts for a new client, detailed instructions need to be obtained from the landlord before a lease is submitted, even in draft form. Those instructions must cover a large number of topics, effectively the matters included in the lease. A detailed checklist of instructions can be found in Lang’s Commercial Leasing in Australia. Where the lease is subject to the RLA, at the commencement of negotiations with a potential tenant, a copy of the proposed lease must be provided to the tenant: s 15. All details must be completed except for particulars of the tenant, the rent and the term of the proposed lease. This means that, before commencement of discussions with a tenant and any advertisement of the premises for lease, a full lease should be prepared with all details except those in respect of the tenant, the rent and the proposed term. This will usually require the landlord to consult with their lawyer before the matter is even placed in the hands of the leasing agent. In addition, the landlord must provide the tenant with a copy of the information brochure about retail leases published by the Commissioner. Failure to comply with s 15 will be an offence punishable by a maximum penalty of 50 penalty units. 8.3 Searches The landlord’s lawyer should search the title of the premises, for example to see if the landlord is the registered proprietor on title, whether there are any restrictions on use of the premises and whether any mortgagee’s consent is necessary. There may also be expired leases shown as registered or caveats for expired leases which need to be removed. © The College of Law Limited 31 THE COLLEGE OF LAW PROPERTY The landlord’s lawyer should conduct searches relating to the tenant and guarantors to confirm that they are not subject to bankruptcy or winding up orders. These searches may be carried out after submitting the lease but before the lease is entered into. 8.4 Lease document When drafting the lease, you may use your office precedents or the standard LIV Lease of Real Estate (Commercial), which is available for purchase in hard copy at the LIV Bookshop or in electronic form online. Practitioners can then draft additional provisions including any required matters that are not covered in the draft lease or that require amendment. 8.5 Submission of lease You must send the lease to the tenant’s lawyer for approval, and, if approved, for execution by the tenant. You should send sufficient copies of the lease, having regard to the landlord, the tenant and any guarantor having to execute the lease. Refer to this as “a draft lease”, as any document is a draft until it is intended to be effective. You can also say that the draft lease is submitted subject to further instructions in case the landlord requires some amendment. You must also include with the draft lease a copy of a bill of costs and estimated disbursements to the tenant, if the tenant is required to reimburse those costs. The landlord should issue a tax invoice to the tenant for costs and disbursements (including GST, if applicable). If the lease is subject to the RLA, lease documentation must be provided at the commencement of negotiations and the appropriate practice will be for the tenant and the landlord’s legal representatives to negotiate terms of a final lease

Practice Paper P305 Commercial Leases PDF 2023

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