Commercial & Retail Leasing from a Landlord & Tenant Perspective and how we can help.
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Hi, I’m Simon Bennett, property law partner at OMB Solicitors. Today I’m going to have a chat to you about leasing, both from a landlord and a tenant’s perspective.
So leasing is the arrangement between the owner of property or the person who has the right to control that property, sometimes a lessee themselves, and a party who takes possession or has the right to use it under an agreement. This agreement usually takes the form of a lease.
It can take the form of a licence or some other tenancy right. So this is what we refer to when we talk about leasing i’m talking generally to you today about what will roughly be referred to as commercial leasing, so that is distinct from residential leasing, which we’re not going to discuss.
The landlord and the tenant both have competing and distinct interests when entering into a transaction of this type. The landlord is concerned about their real asset, their property, and ensuring the value of that is protected and making sure that they secure the income and that they are otherwise protected from the party who’s occupying their building.
Now, a tenant is concerned about getting quiet enjoyment. That is the right to use the property without being interfered with. They’re also interested about how much money they’re going to be paying, and is there any capacity for the landlord to increase that payment?
Is there any additional charges for things like outgoings? Does the landlord have a right to terminate under any circumstances? And we can talk about a couple of those clauses that we need to look carefully for when we’re reading the documents.
But the most important thing that we look at is whether the lease is a retail lease or a general commercial lease, and the reason for that is the different rules apply. So a retail lease is generally a lease of a premises where the business in the premises is a retail business.
Now, those businesses are defined in a schedule to the Retail Shop Leases Act, which is the legislation which governs this area. But there’s another time when a business which isn’t listed as a retail type of business can be caught, and that is where that business is in a premises in a retail shopping centre.
Now, without going into too much detail, a retail shopping centre is generally a centre which has five or more shops of retail nature. So, for example, you could have a business which is clearly not retail, let’s say a legal firm, but it’s in a centre where there are five or more retail shops and the lease of that premises will be caught by the Retail Shop Leases Act and the lease will generally, generally be retail.
So what does that mean? Well, when the Retail Shop Leases Act applies, there’s certain rights and obligations on the parties. For a landlord, there’s disclosure obligations. There’s limitations on what they can and can’t do in the lease and its terms.
For example, a landlord can’t charge certain outgoings under a retail lease that would otherwise be chargeable under a commercial lease. Quite usually, the costs of the landlord are passed on to a tenant for preparing lease documents. But again, under a retail shop leasing arrangement, this can’t be done.
So the landlord will have to bear their own costs. The landlord has other obligations under a retail lease, which will include things like reminding a tenant of when an option comes up. Now, an option is an option on the tenant, usually, to extend the lease for a further period of time. There’s obligations and rights for a tenant under a retail shop lease as well.
The tenant has disclosure obligations and when signing a retail lease, usually the tenant will be required to get independent financial advice and legal advice about the lease. There’s rights attracted to a lease for the tenant as well and those rights are protections around what minimum standards the lease must comply with.
So I’ve already talked to you about the restriction on costs and outgoings being passed. But there’s other restrictions on a landlord regarding, for example, the demolition clause and compensation or relocation clauses and compensation. So this Retail Shop leases Act does provide protection to a tenant.
Under a commercial arrangement, a lot of these protections aren’t in place and the parties are free to contract on terms which are commercial. The main thing to focus on for a landlord, as I alluded to earlier, is increasing or protecting the value of their real property.
So as I indicated, that includes the collection of rent when that’s payable, and what rights they’ve got to increase it. Now, usually rent will be increased on a yearly basis and a specific mechanism for increasing rent will be included in the lease, that could be in accordance with the consumer price index, it could be a set percentage increase, or it could be some other mechanism.
Now, a tenant, as I indicated, is really concerned with their security. They need to know that they’ve got the sole right and exclusive right to use that premises for the period set out in the lease, and if there are options that they can exercise those options without interference for a further term.
They also need to know that they have got an ability to calculate what financially they’re going to be responsible for under the lease. So that will include rent, it could include outgoings, but they need to make sure that it doesn’t include an ability for the landlord to pass on additional costs which may come up, so uncertain costs.
The tenants should also be really careful around demolition clauses, which is a clause giving the landlord the right to demolish the building and terminate the lease early, or alternatively, relocate the tenant from the premise they’re in to some other premises within the building or the complex in the event that it suits the landlord’s interests.
Again, under a retail leasing arrangement, there’s protections in place for a tenant, but these clauses should be read very carefully. Generally, when entering into a commercial or a retail leasing arrangement, both a landlord and tenant should seek expert property law advice.
So that they’re aware of both their obligations and their rights under the documents they’re signing.