Australia: Top ten tips for landlord leasing

This article contains some useful tips and insights on matters of importance for landlord leasing. The information is general in nature and does not take into account any personal circumstances.

  1. Get your commercial terms in order

The document which sets out the agreed commercial terms of a lease has several different names: leasing advice, heads of agreement, agreed terms. The main aim of this document should be to capture most, if not all of the agreed commercial terms between the parties before the lease drafting commences.

The leasing advice should be as concise as possible. Whilst a leasing advice is not usually binding between the parties, it can be relied upon as a record of agreement where specific terms have been agreed and a party seeks to depart from them.

The leasing advice should deal with matters including rent, incentives, the lease term and any option periods, the amount and type of security, the proportion of outgoings payable, if outgoings are payable, details of any licenced area and the licence fee payable, if any. The leasing advice should also include any unusual matters or departures from the terms of your standard lease (see point 4).

Swaab Attorneys has prepared a concise form of leasing advice that includes the above terms and more, which can be used for this purpose. Agreeing to commercial terms in advance of drafting the lease can help prevent excessive costs from disputes and protracted negotiations.

  1. Adequate security

A landlord must ensure it has adequate security in place to provide a monetary buffer in the event the tenant breaches the lease.This is most commonly a bank guarantee or a security deposit – the amount of which should be agreed in the leasing advice.

The amount of the security differs depending on the type of lease, the profile of the tenant and the credit risk of the tenant.Security usually ranges from 4 months' – 12 months' rent plus outgoings (if applicable) plus GST.

Many publically listed companies do not, as a matter of company policy, provide bank guarantees or security deposits.Whilst publically listed companies are often considered a low credit risk, the recent administration and impending closure of Dick Smith Electronics stores should serve as a warning to landlords who blindly agree not to accept a bank guarantee from a publically listed tenant. Of course, this is a commercial decision for a landlord to make.

Swaab recommends requesting an unconditional bank guarantee over a cash security deposit. A security deposit must be lodged with the NSW Government's Retail Bond Scheme (if the tenancy is a retail tenancy), is at risk in certain insolvency circumstances and can be subject to Personal Properties Securities legislation.

  1. Request a personal guarantee, if necessary

Who is the tenant? Is the tenant a $2 company with no assets? Is it a special purpose vehicle that was only incorporated to serve as a legal entity for the lease deal? If this is the case, then a bank guarantee or security deposit can only provide limited recourse to recover any losses or make good any damage if the tenant breaches the lease.

Requesting a personal guarantee from the directors of the tenant company will allow another avenue of recourse where a tenant breaches the lease and the security has been completely utilised.

Don't forget to address this issue in the leasing advice. If you do not include the requirement for a personal or corporate guarantee in the leasing advice, it is difficult to negotiate into the transaction at a later stage.

  1. Ensure you use an up-to-date lease that is tailored to your asset

Is your asset a commercial asset, retail or mixed-use?It is important that your lease is appropriate and tailored to the type of asset you are leasing.

Property laws change and the introduction of or changes to other laws (such as personal properties securities law, workplace health and safety) can have an impact on your relationship with the tenant and how you lease your asset.

You must ensure that the lease used for your asset is tailored to the type of asset you own and is up-to-date with all applicable laws.

Swaab Attorneys ensures that our landlord clients have a tailored lease for their assets, whether retail, industrial or commercial.Our clients enjoy peace of mind knowing that their leases are current and consistent across their assets.

  1. Ensure you have the right documents in place to properly document the lease deal

Not all lease transactions are as straightforward as agreeing terms, negotiating and commencing a lease.

Some lease deals will involve the landlord giving an incentive to the tenant. This could be in the form of a monetary incentive (ie a rent free period or rent abatement) or the landlord may contribute towards the cost of a fit-out or undertake works to the premises.

In some cases, the commencing date of the lease might be contingent upon the happening of a future event, and therefore uncertain. This future event might be upon obtaining development consent, or the completion of landlord or tenant works, or even upon finalisation of construction of the premises itself.

If a lease deal includes an incentive or is contingent upon an event, you may require an agreement for lease or a fit-out/incentive deed.

Deeds and agreements ancillary to a lease can be complex documents and subject to heavy negotiation. Swaab Attorneys' property team has many years of experience in documenting leases and ancillary documents

  1. Specialist lawyer

It is important that your lawyer has the skills and experience (legal and commercial) not only to draft a lease, but to negotiate it with confidence and authority and recognise where your lease will be affected by relevant legislation (for example, Retail Leases legislation).

Swaab Attorneys' property team consists of lawyers with many years of skill and experience across all facets of leasing (acting for major blue chip clients, international property funds, Government, health care providers, retailers, high net worth landlords of retail, industrial and commercial assets, Australia wide). We have the skills and experience to ensure a smooth transaction from drafting to lease registration, which results in the best possible outcome for our clients.

  1. Maintain an easy-to-access central registry of your current leases

It is important to have your current leases easily accessible for quick reference (for yourself and your leasing agents).In today's connected world, there is no excuse for not being able to quickly access a copy of a lease on-the-run, with minimal fuss.

Swaab Attorneys maintains, as a free value add for landlord leasing clients, a data room of current leases (and other relevant documents, such as bank guarantees) which enables landlords and their agents to quickly and easily access lease documents.

  1. Deal with problems/issues quickly for a speedy resolution

Not every lease runs smoothly and is problem-free.

If an issue arises with a tenant, or you have a "problem tenant", it is best dealt with quickly.You should always maintain good communication (either direct or via your agent) with tenants so that any problems can be brought to your (or your agent's) attention and resolved in a timely manner. This can prevent costly disputes and help to prevent the relationship from souring.

A lease term can be for many years. A happy tenant is a good tenant, and a good tenant can significantly improve the value of your asset.

Of course, if there has been a serious breach of the lease (ie, non-payment of money, etc) then relevant legal notices should be issued to the tenant and, in the appropriate circumstances the Landlord should mitigate its loss as soon as possible.

  1. Planning to redevelop?

If you are intending to (or thinking about) redeveloping your asset in the not too distant future you should include an appropriate relocation, redevelopment and/or demolition clause in your lease.

These clauses will allow you to either relocate a tenant if you intend to redevelop your asset, or (depending on the type of lease and the clause that is agreed) terminate the lease before the terminating date so you can undertake the redevelopment and/or demolition.

The form of these clauses will differ, depending on the type of asset (ie, retail or commercial/industrial).As noted above, the Retail Leases Act implies certain terms into your lease which includes terms relating to relocation and redevelopment. It is important that you are aware of your obligations in this regard under the Act.

It is important that you achieve the outcome you are seeking if you are intending to redevelop your asset. Clauses relating to redevelopment/early termination must be carefully drafted.

  1. End of lease obligations

Many issues can arise at the end of a lease where there is uncertainty surrounding the tenant's end of lease obligations.

Is the tenant required to make-good the premises to base building specification? What is the level of base building specification required? Is the tenant required to leave certain fit-out/fittings in the premises, or remove certain fit-out/fittings? Is the tenant required to redecorate the premises?

Uncertainty in relation to a tenant's end of lease obligations can lead to costly disputes, as making-good a premises can be a costly endeavour.

Mary Digiglio, Managing Partner
Phone: +61 2 9233 5544
Email: med@swaab.com.au

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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