A Lease is a legally binding contract enforceable by law which allows a Tenant the right to occupy a premises owned by the Landlord, for carrying on a business. It sets out the rights and obligations of both parties.
Never sign a Lease unless you completely understand and agree with all the clauses. Make sure you get good financial and legal advice before you sign anything.
The Lease usually defines:
- the lettable area by describing it (and usually includes a plan where possible);
- annual rent and outgoings;
- the date and method of rent reviews;
- each parties’ rights;
- each parties’ obligations and liabilities;
- conditions which apply to the use of the lettable area e.g. rent and how long the Tenant can occupy that area.
In South Australia, retail shop leases are governed by the Retail and Commercial Leases Act 1995, Retail and Commercial Leases Regulations 2010 and Landlord and Tenant Act 1936 all of which are administered by the Office of the Small Business Commissioner.
Although there are some exceptions, a retail shop lease is a lease of a premises at which goods are sold, or services are provided, to the public.
Generally, the Act does not apply to a Lease to a public company (or a subsidiary of a public company), a bank or building society, an insurance company, the Government, councils or licensed premises, in cases where the annual rent liability exceeds $400,000.00 or to a Lease for a fixed term of less than one month (known as a short term lease).
We prepare our Leases on the presumption that the Act applies. Only when it is clear that the Act does not apply, can the parties negotiate terms beyond what is acceptable under the Act, and we would ensure that the Lease is prepared accordingly.
As a Lease is a legally binding contract which creates an ‘interest in land’, only a legal entity such as an individual or private (Pty Ltd) company can hold an interest in land and, therefore, sign a Lease.
A Lease cannot be in the name of a business (i.e. the Tenant’s business name) or an individual under the age of 18.
The Landlord is legally required to give the Tenant:
- the proposed Lease as soon as negotiations start; and
- a Disclosure Statement which includes an estimate of outgoings (additional operating expenses e.g. rates & taxes).
After the Lease is signed by all parties, the Landlord must provide the Tenant with a completed copy (or photocopy) within 28 days.
A Disclosure Statement is a regulated document prescribed by the Retail & Commercial Leases Regulations 2010 which must be completed by the Landlord and given to the Tenant prior to entering into a Lease. It outlines important information about the Lease, for example:
- the term of the Lease;
- whether there are options for further terms;
- the occupancy costs for leasing the premises (including rent and any outgoings);
- specific information for shopping centre Leases; and
- Tenant’s fitout requirements.
As soon as negotiations begin, the Landlord must provide a copy of the proposed Lease to the prospective Tenant together with a completed and signed Disclosure Statement. A Disclosure Statement is also required each time the Lease is renewed. The Act and Regulations specify what has to be included in the Disclosure Statement. Further statements must be given at least one month before each accounting period (usually the end of the financial or calender year) with an updated estimate of outgoings. It is important that the Landlord follows these procedures and diarise these dates.
In addition to the Disclosure Statement and the annual outgoings/operating expenses statement, the Landlord must also give the Tenant a report showing what expenses have actually been paid by the Tenant each year and any under-payment or overpayment of the outgoings is to be adjusted between the parties within the same period. There is no set form for the report. The report must be prepared by a Company Auditor and provided to the Tenant within three months of the end of the financial year (i.e. before 1st October). This rule applies no matter how large or small the premises are. The only exception is if the only outgoings are rates, taxes and insurance and if the Landlord gives copies of the receipts to the Tenant.
Outgoings are expenses incurred by the Landlord on account of operating, repairing and maintaining the premises and can include, for example:
- administrative and management costs;
- government charges (rates and taxes);
- insurance costs;
- maintenance and repair costs; and
- establishing a sinking fund for major repairs and maintenance (special rules apply to sinking funds and you should seek advice if you propose establishing one of these).
Generally speaking, the following cannot be recovered from the Tenant under the Retail & Commercial Leases Act 1995:
- capital costs of the premises (with certain exceptions);
- depreciation costs;
- land tax;
- expenses not properly and reasonably incurred; and
- finishes, fixtures, fittings, equipment or services which were not included in the Disclosure Statement.
The Tenant is only required to pay for outgoings that relate to the Tenant’s leased premises.
Where the premises is part of a large property/building the Tenant may also be required to contribute to the general expenses of that larger property/building and would pay a percentage based on the lettable area of the premises in proportion to the whole property/building.
If the Landlord is registered for GST and required to pay GST, the Landlord must add the GST amount on top of the rent and outgoings.
Generally, the Landlord will take out an insurance policy for the entire building/land and pass on the Tenant’s share of the cost as an ‘outgoing’.
The Tenant must take out its own insurance for its business, public liability, contents and plate glass for its full replacement value.
Public liability insurance cover is typically $20,000,000 for any one occurrence.
If the Retail and Commercial Lease Act (“the Act”) applies, the Landlord cannot pass on Land Tax as an outgoing.
If the Lease is not subject to the Act then the Landlord can pass on Land Tax as an outgoing.
To the extent permitted by law, a Tenant will have a right to purchase electricity from a retailer of its choice.
A Tenant can purchase electricity from the Landlord.
New electricity legislation now prescribes the rights between Landlords and Tenants relating to the sale of electricity.
A retail Lease must be for a term of five years or more and any options given must be included in calculating the minimum term. The five year term can either be:
- one term of five years; or
- made up by adding together the initial term and the options to renew. For example: a lease with a term of two years and three rights of renewal of one year each would satisfy the Act as the total term offered amounts to five years.
If either party does not want to be locked in for a five year term (and the other party is agreeable), then the five year requirement can be waived by having the Tenant’s solicitor complete a Certified Exclusionary Certificate at the time of entering into the Lease.
The Lease will specify whether there are rights of renewal. For example, if a Lease comprises a term of one year with two rights of renewal of two years each, the Tenant can renew its Lease after the first year by giving notice to the Landlord within the time-frame stipulated in the Lease. The Lease would then be renewed/extended for the next term of two years with one remaining option of renewal of two years left.
In any case, not less than six months (and no more than twelve months) before the expiry of the Lease the Landlord must give written notice to the Tenant letting the Tenant know if they:
- are offering a renewal (or extension) of the Lease, or
- do not propose to renew or extend the Lease.
There are additional rules to be met if the premises are part of a retail shopping centre.
Generally, Tenants have a statutory preferential right of renewal when their Lease expires. The Retail and Commercial Lease Act sets out the rules that govern the granting of the preferential right and where that preferential right can be excluded.
If the Landlord allows the Tenant to “hold-over” (stay on) in the premises past the expiry date of the Lease, the Tenant does so as a monthly Tenant and either party can end the monthly tenancy on one month’s notice to the other party. If the Tenant holds over for more than six months after the Lease ends then another five year lease may inadvertently be created.
Most leases provide for annual rent increases.
Rent can only be increased (reviewed) according to the conditions set out in the Lease and subject to the Retail and Commercial Lease Act and must not be increased more often than once every 12 months unless a fixed amount or specified percentage is noted.
Common methods for review are ‘CPI’, ‘Market Value’ and fixed ‘Percentage’.
- Rent is increased in accordance with increases in the nominated Consumer Price Index which is the most widely accepted measure of inflation.
- Market Value
- Rent is increased to the fair market rent of comparable premises in the area and in-line with market conditions. It does not take into consideration any goodwill created in respect of the premises because of the Tenant’s use and business.
- Usually this is done by agreement between the Landlord and Tenant but if they cannot agree on an amount, it is determined by an independent valuer (which can result in increased costs and delay for both parties).
- Although unlikely, this method could in certain circumstances, lead to a reduction in the rent. This could occur in situations where the rent has steadily increased over time (usually higher than CPI) to a point where it is beyond what is considered the fair market rent at the time of review.
- Fixed or Percentage
- The rent is increased to an agreed amount or by an agreed percentage.
- This method provides the benefit of certainty of increases and can be included in the Tenant’s forecasted budget.
A bond acts as security. It can be claimed by the Landlord if there is any money owed by the Tenant during or at the end of the Lease – e.g. cleaning costs, rent arrears.
The bond will be for a maximum of 4 weeks rent excluding GST (not one calendar month but 4 weeks) and must be lodged with the tenancies branch of Consumer & Business Services.
In the context of a Lease, a bank guarantee is a form of security and is similar to a bond but far less regulated.
A bank guarantee is a promise to the Landlord made by a trading bank on behalf of the Tenant to pay, on demand, the Tenant’s debts (i.e. rent arrears) up to a specified sum if the Tenant is unable to meet its obligations under its Lease. It is usually valid for the entire term of the Lease and can be increased after being called upon and when the rent is increased, if so agreed.
In contrast to a bank guarantee, a guarantor is a person who guarantees the performance of the Tenant in meeting its obligations under its Lease. In the case of a default (i.e. failure to pay rent) the guarantor is required to meet those obligations on behalf of the Tenant.
In the case of a default by the Tenant, the guarantor must compensate the Landlord immediately on demand.
A guarantor is usually required if the Tenant is a company. It is usually the directors of the company who become guarantors and it is their personal assets ‘on the line’.
A Deed of Guarantee must be signed by the person guaranteeing the performance of the Tenant and the guarantee should only end when the Lease does.
Registration of a Lease means that it will be noted on the certificate of title to the land and therefore binds a future purchaser of the land to abide by the terms of the Lease.
Generally registration is of most benefit to a Tenant as it provides the best security of tenure but it is generally not to the Landlord’s detriment.
If the Tenant asks for the Lease to be registered, the Landlord must co-operate and allow the Lease to be registered.
There are additional costs applicable for registration. See our costs schedule for details.
When the Landlord’s property has a registered mortgage over it, it is necessary to obtain the mortgagee’s consent to the Lease. In giving consent, the mortgagee is acknowledging that the Tenant is in occupation of the property.
If the mortgagee ever had to enforce its rights under the mortgage (i.e. sell the property to raise funds) it would have to do so subject to the Tenant’s rights and the terms of the Lease.
If mortgagee consent is not obtained, not only could the Landlord be in default of its loan agreement, the Tenant’s rights of tenure could be ignored by the mortgagee.
We obtain mortgagee consent each and every time we prepare a Lease. There are additional costs involved and these are normally shared equally by the parties. See our costs schedule for details.
Generally, the Tenant is responsible for keeping the premises clean and in good order and, subject to ‘fair wear and tear’, the premises must be kept in the same condition as when the Lease begins. This includes:
- plant and/or equipment in the premises;
- appliances, fixtures or fittings related to services e.g. gas, electricity, water or drainage; and
- plate glass.
The Landlord is normally responsible for maintaining and replacing fixtures of a structural nature unless such repair is required due to the negligent act or failure to act by the Tenant or due to its specific use of the premises.
A transfer or an assignment document must be prepared and signed by all parties involved.
However, when a Lease is assigned (transferred) to another party, there are strict guidelines to follow under the Retail and Commercial Lease Act (“the Act”). The continuing liability of a Tenant who assigns a Lease is limited to a maximum period of two years but only if the guidelines are followed.
The Landlord must first consent to the assignment and has 42 days to consider and respond to the Tenant’s request.
The Landlord must act reasonably when considering a Tenant’s request for an assignment and can only refuse consent in strict circumstances. Generally, these are:
- if the proposed Tenant intends to change the permitted use;
- if the Landlord reasonably believes that the proposed Tenant is not likely to be able to meet the financial obligations under the Lease;
- if the Landlord reasonably believes that the proposed Tenant has inferior retailing/business skills in comparison to the existing Tenant;
- if the Landlord reasonably believes that the existing Tenant has not complied with the procedural requirements for obtaining consent under the Act.
It is an offence if the Landlord accepts a ‘payment’ or ‘premium’ for granting consent.
The parties can end a Lease by agreement or re-negotiate the terms of the Lease at any time to suit any change in circumstances.
However, if the parties are not in mutual agreement to terminate the Lease early, the party who terminates the Lease would be doing so unlawfully and would, therefore, be in default of the Lease.
At least six months, but no more than 12 months, before the expiry of a Lease, the Landlord must either offer the Tenant a new Lease or notify the Tenant that the lease will not be renewed.
The Tenant can continue the Lease as a monthly Tenant for up to six months from the date of expiry.
The Tenant must fulfill its obligations in accordance with the terms of the Lease which usually include removing all personally owned property from the premises including shop fittings, false walls and signs as well as repair flooring, wiring, painting, cleaning etc.
The Retail and Commercial Lease Act stipulates that the Lease preparatory costs are to be shared equally between the parties. This includes renewals/extensions, variations, surrenders, bank consent and production of certificate(s) of title.
The Tenant is to otherwise pay 100% of stamp duty (if any), Lands Titles Office registration fee(s), and guarantee and assignment costs.
A Lease is a legally binding contract. It can only be changed if both parties are agreeable to the change and the changes would need to be documented in a Deed of Variation.