How to understand leases

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Why is this important?

A lease is a special type of contract between the lessor (the owner) and the lessee to use the property of the owner. Both lessees and lessors have certain legal obligations. Signing a lease that has not been read thoroughly and completely understood can be fraught with difficulties and could prove costly for the lessee. Leases can include a variety of different provisions and once a lease is signed these terms are legally binding.

A lease can relate to land, or to personal property such as motor vehicles, photocopiers and telephone systems. Where the lease relates to land the owner is called the "landlord" and the lessee is called the 'tenant'.

The Retail Leases Act 1994 applies to 'retail shop leases'. This term is defined by the Act to include most of the businesses that are generally considered to be retail businesses. There are some exclusions, most notably shops with an area of 1,000 square metres or more. The Act also does not apply to leases for less than six months or more than 25 years.

Under the Act the term of the lease should be for a minimum of five years (including any additional term under right to renew). If it is to be for a shorter period, the tenant must see their solicitor or conveyancer to get a section 16 certificate. The Act also regulates how the rent can change and the outgoings that the landlord can recover. The landlord cannot recover outgoings unless they are specified in the lease. The way they are to be recovered and how they are to be apportioned are also specified.

The terms of the lease are generally negotiated between the landlord and the lessee, or in some instances the solicitors of the two parties. Some of the main issues that need to be addressed in the lease are the term of the lease, the amount and frequency of the rent, details of the tenant's responsibility for the property outgoings, permitted uses of the property, the option if applicable and the bond or bank guarantee if applicable. It is advisable to consult with a solicitor to assist you in negotiating the terms of your lease. If you need help in finding a solicitor you can get assistance from the Law Society.

In NSW the lessee pays for his own legal costs. The lessor can no longer pass on their costs for entering the lease.

If the lease is for retail premises then the lessor needs to make sure the lease complies with the guidelines set out in the Retail Leases Act.

What to do

Obligations of the lessee

Most leases hold the lessee responsible for keeping the premises, fixtures and fittings in good repair. Many leases provide for payment of all or a portion of costs of rates, insurance, maintenance and so on. Make sure these are clearly stated and obtain an estimate of your share, as they are additional to your base rent. If you vacate premises before the lease expires you may still be liable for payment of rent and ongoing costs if a new tenant cannot be found. The lessee should make the same inquiries he would make if he were purchasing the property.

Registration of the lease

In NSW 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.

What information do I need before signing the lease?

The lessor must provide the lessee with a signed copy of the lease. If the lease is for a retail shop, the lessor is also required to provide a Disclosure Statement to the lessee at least seven days before the lease is entered into. The statement should be read carefully as it contains important information such as the location and area of the premises, the lease term, outgoings and the permitted use of the premises — be sure to read the appendix. Both parties should make sure that they speak to their solicitor, accountant, the local council (to be sure there is approval for the use) or business adviser before they sign the lease. It is particularly important to get expert advice on the GST implications of leases signed after December, 1998.

Source: SMExcellence

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