Legal Obligations in a Commercial Lease

By Lachlan Commins, Patterson Houen & Commins, Lawyers, Sydney

You own a business and you are about to enter a lease for your new premises. You have decided to save your money and not employ the services of your solicitor cousin Barry to handle the negotiations for the lease. You employed a solicitor the last time you took up a commercial lease and you now know (or you think you know) what the most important things are to look out for in a commercial lease (besides, you regularly binge-watch “Suits” and consider yourself a legal maestro).

Lease Costs

Negotiations for the lease have concluded and you are reading and willing to execute the lease so you notify the lessor’s solicitor to email it to you (unlike you, the lessor has thought it prudent to retain the services of a solicitor). You receive the email from the solicitor and scan through the solicitor’s instructions so they can give the order for the keys to be released:

1. Print, sign and email back a scanned copy of the lease;
2. Post the original hardcopy of the signed lease to the solicitor so it can be registered;
3. Enclose a cheque for $141.60 in favour of NSW Land Registry Services for the lease registration fee;
4. Transfer the cash security bond to lessor’s nominated account;
5. Pay the lessor’s legal fees as per the attached invoice.

WHAT!!!! The solicitor has actually attached an invoice for their fees in connection with the preparation and negotiation of the lease and you have to pay them! But, you think to yourself, I didn’t have to do this last time…

The requirement for the lessee to pay for the lessor’s reasonable legal costs in connection with the preparation and negotiation of the lease and its terms is a common term in all commercial leases in New South Wales. This includes whether the lease has been specifically drafted by the solicitor or whether an “off-the-shelf” lease has been used (such as the commonly used commercial lease published by The Law Society of New South Wales). In fact, it is uncommon to come across a commercial lease without this requirement.

The confident yet unsuspecting lessee in the example above may not have been required to pay the lessor’s legal costs in previous commercial leases because of two possible scenarios:

• The lease contained no requirement for the lessee to pay the lessor’s legal costs or this right was not enforced by the lessor

It is important to remember that although most commercial leases do include the term requiring the lessee to pay the lessor’s legal costs some may not. Alternatively, some leases may include the term but it is subsequently not enforced by the lessor. Alternatively, the lease may initially include the term but it is then removed from the final form of the lease as an outcome of negotiation and agreement between the parties or their solicitors.

The requirement for the lessee to pay for the lessor’s reasonable legal costs is not something that is legally required to be included in the lease. It is included to benefit the lessor and it can be removed if the parties agree during their negotiations. From the lessor’s perspective the requirement is beneficial as they are nearly always the party responsible for the preparation and dissemination of the lease and to this extent seek to pass on this cost to the lessee.

• The lease was a “retail shop lease” covered by the Retail Leases Act 1994

In New South Wales if a commercial lease is for premises to be used as a “retail shop” it is referred to as a “retail shop lease” and is regulated by the Retail Leases Act. A “retail shop lease” cannot include a term requiring the lessee to pay for the lessor’s legal costs for lease preparation expenses and any such term which has been included is void (indeed a contravention of this rule may incur penalties for the lessor or its representative).

The Act sets out a very detailed and comprehensive schedule of business types to which the Act applies from “Adult books and toy shops” (first) to “Writing materials shops” (last) and nearly every conceivable and imaginable retail business type in between. Further, the Act may apply to a business not specifically listed in the Act but that has premises within a “retail shopping centre”.

This may give rise to numerous borderline applications: for instance, a physiotherapy practice is not listed specifically in the Act but may nevertheless be covered by the Act if it is located within a shopping complex – as many are these days (think Westfield, Stockland or Mirvac).

Legislation in Australia

Similar legislation has been enacted in all states and territories of Australia; however in South Australia a lessor may require the lessee to pay up to half of its lease preparation costs.

The provision allowing for the lessor to pass on its legal costs is usually qualified to the extent that such costs must be ‘reasonable’. Of course, what constitutes ‘reasonable’ is a matter of degree that is influenced by such factors as the length and complexity of the particular lease terms and the nature and intensity of ensuing negotiations. However, do not be surprised even for a straight forward lease if such costs are in the ballpark of $2,000.00 plus GST (such costs may be more or may be slightly less).

As lessee you may be able to claim both a credit for the GST included in the lessor’s solicitor’s invoice and an income tax deduction in relation to the net amount as a business expense. Accordingly you should make sure that the particular invoice is addressed specifically to you or your company (depending on which entity is the lessee).

Seeking Advice

Entering a significant and complex commercial transaction such as a lease without the appropriate advice is like entering unchartered waters without a map – you may eventually find your way but you may end up scuttled on the rocks.

If our learned friend had retained the services of his cousin Barry prior to commencing negotiations for the lease he would not only have saved himself from a nasty and unexpected surprise in the form of payment of the lessor’s legal costs he would also have been properly advised and represented regarding:

1. Whether certain terms of the lease can be negotiated or amended in his favour including a cap to the amount that the lessor’s solicitor can charge;
2. The impact and effect of the most significant points of the lease;
3. Whether the Retail Leases Act 1994 applies; and
4. The taxation implications of his payment of the lessor’s legal costs (although such advice should be confirmed and verified by a qualified accountant).

Retaining the services of a solicitor prior to commencing negotiations for your lease may not prevent you from being liable to pay the lessor’s reasonable legal costs for the preparation of the lease but they may be able to negotiate an upper-limit to such costs as well as improve your negotiation position heading into the lease which may have long-term financial (and emotional!) gains for you and your business over the duration of the lease.

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