Australia: Landlord and Tenant Alert: Negotiations - sorting out the issues

Last Updated: 22 July 2012
Article by Andrew Zadelis

Focus: Relevant clauses to be considered in lease negotiations
Services: Property & Projects
Industry Focus: Property

With any commercial transaction the negotiation stage is critical. Relevant issues need to be identified and agreed in principle between the parties prior to formal documentation being entered into.

In lease transactions, the parties (or their agents) often sign up heads of agreement outlining the intended commercial terms and any unusual legal provisions. Lengthy delays in ultimately agreeing on formal lease documents can often be avoided if attention is given in advance to the relevant issues when heads of agreement are compiled.

A host of issues may need to be covered off. In this Alert we focus on:

  1. Relocation clauses
  2. Demolition clauses
  3. Expansion clauses
  4. Contraction clauses

Relocation clauses

A relocation clause allows the landlord to move the tenant to alternative premises within the building, centre or estate.

Such a clause would usually be included in a lease if the landlord anticipates requiring the premises for another purpose prior to the end of the term (e.g. for redevelopment of the building or reconfiguration of the tenancy mix). Issues to be considered by the tenant include:

  • What premises will the tenant be relocated to?
  • Are the new premises in a better or worse position than the old (i.e. is there a commercial benefit attaching to one of the premises)?
  • What rent per square metre will be payable for the new premises (having regard to the commercial benefit of the new premises compared to the old)?
  • The extent and cost of the make good to be undertaken in the old premises.
  • The extent and cost of fitting out the new premises.
  • The disruption to the tenant's business whilst moving and fitting out the new premises.
  • What compensation will be payable by the landlord?

Demolition clauses

A demolition clause allows the landlord to terminate the lease if the landlord intends to demolish the premises, usually as part of a larger demolition project.

Such a clause is usually included in leases where the landlord thinks an opportunity may arise during the term of the lease to develop the property and may require the demolition of the premises as a part of the proposal. Issues to be considered by the tenant include:

  • What effect will termination of the lease have on the tenant's business?
  • What period of notice will the tenant receive or require in relation to the proposed demolition?
  • If no relocation provision is included, the need to find new premises, negotiate a new lease and fit out the new premises.
  • The disruption to the tenant's business whilst moving.
  • What compensation will be payable by the landlord?

Expansion rights

Expansion rights in a lease usually allow the tenant a certain period within which to notify the landlord if it requires additional space within the building. Such a clause is usually included in leases where the tenant's business plan predicts growth and the need for increased accommodation during the term of the lease. Such clauses will usually specify:

  • The areas of the building, centre or estate over which the tenant is to have expansion space rights;
  • The rent payable for the expansion space (usually linked to the rate payable for the currently leased space); and
  • The conditions upon which the expansion rights may be exercised.

The landlord will need to keep a careful record of all expansion rights granted by it and when they arise.

Contraction rights

As opposed to expansion rights, a contraction right in a lease usually allows the tenant a certain period within which it can notify the landlord that it wishes to surrender part of its tenancy.

Once again this clause benefits the tenant. It allows the tenant to reduce its rent obligations when there is a downturn in its business and its accommodation requirements are reduced. Issues to be considered by the landlord include:

  • The timing for the tenant to exercise the right, the length of notice required and the potential for the landlord to lease the space handed back; and
  • The likely leasing market conditions that might apply when the space is handed back.

Retail Leases Act

Where a State's retail leases legislation applies, it will generally override any commercial agreement between the parties which conflicts with its provisions. Landlords and tenants will need to ensure that the commercial terms negotiated by them comply with the requirements of the Act where applicable.

These are some of the matters which need to be considered when heads of agreement are drawn up. Detailed consideration at an early stage of these topics and any consequential issues will help ensure that the parties are still smiling at the end of the transaction.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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