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Commercial Leases in NSW
Commercial leases in NSW are interests in commercial premises (for example, office buildings) that are granted by one person, the ‘landlord’, to another, the ‘tenant’. They confer a right on the tenant to exclusive possession of the commercial premises for a certain period of time. Commercial leases in NSW are generally not regulated by statute but by common law.
For the most part, however, it is up to the landlord and tenant to decide the terms of the commercial lease. Some commercial leases relating to retail shops are governed by a special statutory regime contained in the Retail Leases Act 1994. Other rules affecting the creation of commercial leases are found in the Conveyancing Act 1919 and the Real Property Act 1900 .
Terms of commercial leases in NSW
If you are a landlord or a tenant under a commercial lease, then the lease itself will set out the term of the lease and your rights and obligations in relation to the tenancy. If the term of the lease is greater than 3 years and relates to Torrens title land (which will almost always be the case), then the lease must be registered with the NSW Office of Land and Property Information in order for it to be indefeasible (ie for it to guarantee the tenant’s right to exclusive possession of the premises for the term of the lease).
Furthermore, a number of covenants (agreements or undertakings) are implied into the commercial lease under both the common law and statute, but these covenants will not apply if there is an inconsistent express covenant in the lease itself. These implied covenants include:
- a covenant on the tenant to keep the premises in good condition
- a covenant to pay rent
- a covenant to allow the landlord to inspect the commercial premises, and
- covenants to re-enter the premises for breach or non-payment of rent.
‘Pitfalls’ in commercial leases
There are a number of key clauses and issues you should watch out for if you are a tenant entering into a commercial lease. Some common issues are:
- You should make sure there is an option to renew the lease when it expires. If there is no option, then the landlord may not grant you another lease to continue operating in the premises.
- If there is a mortgage over the commercial premises that are the subject of the lease, you should make sure that the mortgagee has consented for the property to be leased to you. If they have not consented, then they may be able to terminate the lease if the landlord fails to make their mortgage payments.
- Review the rent clause in the lease. There may be a ‘ratchet clause’ which prevents the rent you pay going down when there is a market rent review. Although such clauses are legal in non-retail commercial leases, they are not legal in retail leases.
- Check the repairs and maintenance clause. This clause is the source of many disputes between landlord and tenant. This clause will usually state what you will pay for, and what you will not pay for. However, things you will not pay for are not necessarily the obligation of the landlord, so make sure that the lease specifies what the landlord will pay for. If there is no such clause, you will be responsible for making small repairs (eg replacing light bulbs) and must keep the premises in good repair, but you will not be responsible for structural repairs.
- Check for a refurbishment clause. This clause may allow the landlord to refurbish the premises whilst the lease is still on foot, disrupting your business.
If you assign your interest under the lease (or the landlord assigns their interest), not all rights and obligations will necessarily apply to the assignee. Furthermore, if you breach the terms of the lease and then assign your interest under the lease, you may still be sued for the breach.
A retail lease is a commercial lease lasting at least 5 years for a retail shop, whether it be a bakery or a hairdresser. Most retail leases are subject to the terms of the Retail Leases Act 1994, the purpose of which is to give retail tenants some extra protection. However, retail leases which last for 25 years or more, or relate to significantly large retail shops (ie greater than 1000m2), are not subject to these terms.
Some of the key protections given to you if you are a retail tenant are:
- Retail tenants are given a retail tenancy guide and copy of the lease during negotiations. This is not required for non-retail commercial leases.
- Landlords have certain obligations to deal with any security bond or guarantee you pay appropriately. This helps protect your security bond.
- Ratchet clauses are not permitted in retail leases. This means your rent may go down when there is a market rent review.
- If the retail lease can be terminated on demolition of the building, you must be given 6 months notice and must be compensated for any costs you were required to incur in fitting out the shop.
Resolving lease disputes
You must apply to the court to settle any disputes you cannot settle with your landlord or tenant (as applicable). However, retail leases have their own dispute resolution mechanism.
You can request that the Registrar of Retail Tenancy Disputes mediates any dispute you have with your landlord or tenant.
Alternatively, you can request that the NSW Civil and Administrative Tribunal settle such a dispute, but the tribunal’s jurisdiction is limited to $400,000.