Australia: Service station leases: Ensuring the lease is manageable and saleable

Introduction

Service stations are seen by some as a "recession proof" investment. They are popular with all kinds of investors, from individuals through to large institutional funds. In this article, we identify several key issues that are specific to leases of service station sites and which should be addressed to ensure that the lease is manageable and the investment, for both landlord and tenant, is secure.

Initial Environmental Site Assessment Report

Before the tenant takes occupation of the site, an Environmental Site Assessment Report (ESA) should be obtained to ascertain the level of pollution or environmental damage existing on the site at the commencement of the lease. This initial ESA can then be used as a benchmark for the standard to which the premises should be remediated at the end of the tenancy.

The lease should:

• expressly refer to the ESA obtained, and
• confirm that the landlord and tenant agree that the ESA is to be used as a baseline report for the purposes of effecting remediation at the end of the tenancy.

Remediation

In general terms, a person who causes environmental harm is liable under the Environmental Protection Act 1994 (Qld), the Protection of the Environment Operations Act 1997 (NSW) or comparable legislation in other Australian jurisdictions.

Given the nature of operating a service station and the potential for catastrophic environmental damage, it is critical for the lease to clearly apportion liability for any pollution caused by the tenant, or otherwise occuring in the premises, during the term of the lease. It is usual for the tenant to be wholly responsible for remediation of all pollution and compliance with all environmental laws while in occupation of the premises. Indemnities are commonly sought by landlords wanting to ensure protection in this regard.

Consideration should also be given to whether the tenant is responsible for environmental harm discovered after the end of the term, or outside the premises, that can be traced to a cause arising during the term, or in the premises. This is particularly relevant in jurisdictions (such as NSW) where an owner of land may have a responsibility prescribed by legislation to take action to minimise known instances of pollution.

The lease should give certainty as to who will bear the cost and responsibility for any remediation required. It is usual for a final ESA to be obtained which provides guidelines as to what remediation may be required to accord with environmental laws and the agreement reached between the landlord and tenant.

Ownership of assets and infrastructure on site

Many of the fixtures and items essential for the operation of a service station are underground (eg tanks, fuel lines, pumps and so on). There are also above-ground tanks, pumps and buildings. All are costly and require regular maintenance.

The lease should clearly identify whether responsibility for installation, repair, maintenance and replacement of these items belongs to the landlord or the tenant. This is particularly important for NSW which has specific regulations requiring those in control of underground petroleum systems to install monitoring equipment and to test the integrity of the system.

It is common for the landlord to install and retain ownership of the infrastructure, while the tenant is obliged to carry out repairs and maintenance throughout the term. Replacement of certain items which reach the end of their useful life is normally considered to be a capital expense and would usually be the landlord's responsibility.

Retail shop leases legislation

Retail shop leases legislation may not apply to service stations in the way it applies to other retail businesses. This is relevant as the legislation generally has an impact on amounts recoverable by the landlord as outgoings, and restricts the potential scope of other conditions in the lease.

For example, the Retail Shop Leases Act 1994 (Qld) (the Act) does not apply to leases of premises in Queensland for operating a service station business if it is carried on under a franchise agreement governed by the Oilcode. However, the Act (other than Part 6) does apply to 'retail shop leases' for the carrying on of a service station business in Queensland if the business is not carried on under such a franchise agreement.

Even if the Act does apply generally, Part 6 (which contains a prohibition on recovery of land tax and restrictions on recovery of other outgoings by the landlord) does not apply to leases of premises where a service station business is operated. Therefore, landlords may recover land tax, for example, from the tenant as an outgoing if the lease so provides.

Additionally, a 'retail shop lease' in Queensland does not include a lease of a retail shop with a floor area of more than 1,000m² by a listed corporation or its subsidiary, which is commonplace for service stations.

These are examples pertaining to Queensland. The retail shop leases legislation applicable in the jurisdiction where the premises are located will need to be checked to see which particular aspects may have a bearing on a service station lease. These issues will need to be considered in detail during negotiations and in the preparation of the lease.

Conclusion

Leases of service stations are complex and vary considerably from other business leases. Commercial issues and the impact of statutory regulation must be considered before documents are drafted.

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.