Business property leases: practical matters in Australia

Introduction

This page provides free information to landlords and to tenants about the practical matters arising from having a business lease. It applies to all commercial leases. Special rules apply to specific leases, such as a lease of property for use as retail premises.

It is invariably the landlord who submits the lease to his prospective tenant; therefore the guidance notes provided with each document are largely from the perspective of a landlord. However, this information page is directed to both parties.

Note: the words "lease" and "tenancy agreement" are interchangeable, as are “landlord” and ‘lessor”, “tenant” and “lessee” I know all this. Just take me to where I can choose a document to buy.

Contents

• Leases: an introduction
• Planning issues;
• Registration of the lease;
• Stamp duty;
• Personal guarantee.

Leases: an introduction

A lease is a contract between the lessor (the owner) and the lessee to use the property of the owner. A lease can relate to land, or to personal property such as motor vehicles, printers and telephone systems. If the lease relates to land, the lessor is called the landlord and the lessee, the tenant.

Depending on which state of Australia you are in, different legislation will determine the rules on leases. Furthermore, different types of leases are governed by different pieces of legislation. For example, in Queensland, the Retail Leases Act 1994 applies to "retail shop leases".

Planning issues

As well as checking with the local authority that his proposed use is lawful, the tenant should make sure that the landlord knows exactly for what he intends to use the building, and that it is approved. The intended purpose should then be written into the lease to save disputes later. It is important that a tenant considers his future requirements. It is very easy to change the direction of a business and find you fall foul of your lease. Alternatively, a tenant may want to assign the lease to someone who wants to use the building for a different purpose.

The question of user becomes more important the longer the lease, where the use is more likely to change over time. Solicitors for landlords who do not have much property valuation knowledge, frequently fix the use clause narrowly - perhaps with the thought that if the tenant needs to change the use in any way he will have to come back to the landlord, and perhaps pay a fee or more rent for the privilege. He misses the point however that at a rent review the new rent will be calculated by reference to the rack rent (then current rent) payable in the open market. Clearly, a theoretical open market value would be lower if the number of potential tenants is fewer. A landlord should therefore think particularly carefully before imposing a use restriction which limits a change to a use which in fact provides a lower rental value than some other potential use. Generally speaking, the wider the use allowed, the greater the rental value.

Registration of the Lease

In most states, if the lease period exceeds three years, including any options, a memorandum of the lease should be prepared and registered with the Land Titles Office. Once registered, a lease is a legal interest and gives the tenant protected rights over the property. Net Lawman suggests you register all leases.

Stamp duty on leases

You cannot use as evidence in court any document transferring an interest in property, unless it has been stamped. That includes a lease. The rate is calculated as a percentage of the average rent for the term.

Each State has its own laws for stamp duty, pay-roll tax, land tax, FID and Debits tax. If there are review provisions, the State Office will generally accept a calculation based on the starting rent. These taxes are administered by the States and Territories and inquires should be directed to your local revenue office:

List of local revenue offices:

Personal Guarantee

Where the prospective tenant is a limited company, it is usual for the landlord to ask for one or more personal guarantees of the rent and other provisions of the lease. The usual guarantors of a company lease are the directors of the company. A personal guarantee is a way of making the directors personally liable for the obligations of the company or other legal business. Caution is advised when entering into a personal guarantee.