There are two main types of arrangements allowing a person, company or other organization to occupy real estate for a limited period of time without buying it outright.
The first is a lease, which grants the right of exclusive possession of the property for an agreed period of time. A lease confers on the tenant contractual rights and a proprietary interest in the property, which can be transferred to a third party subject to specific restrictions set out in the lease.
The second is a licence which grants permission to occupy the property. Unlike a lease, the occupier of a property under a licence does not have exclusive possession of the property and generally cannot transfer the licence to a third party. Generally, licences are not registered on a public register with the relevant government authorities.
Last modified 31 Aug 2020
There is no minimum or maximum term for a commercial lease. The duration of the lease term can be for any number of years or up to a fixed date.
Generally, a commercial office lease for a larger tenant will be for eight to ten years with one or two option terms (exercisable by the tenant) of three to five years each. In most Australian jurisdictions leases for a period which exceed three years must be registered on a public register with the relevant government authorities for the lease to be legally effective. The main benefit of registering the lease on a public register is to provide third parties with notice of the tenant's leasehold interest in the property.
However, retail leases (relating mainly to leasing of shop space in shopping centres) are governed by specific legislation and, in most jurisdictions, retail leases have a minimum term (inclusive of options for renewal included in the lease) of five years, unless the tenant agrees to waive that right.
Last modified 31 Aug 2020
There are specific laws and regulations governing leases, which vary across the different Australian jurisdictions.
Commercial leases covering industrial property, offices, retail property and hotels are generally governed by case law and statute, although there are specific provisions in the relevant legislation in most Jurisdictions which impact on their terms in generally minor ways. There are also statutory regimes in each Australian jurisdiction that govern the registration of leasehold interests.
Retail property is governed by specific legislation in each jurisdiction (eg Retail Leases Act 1994 (NSW)).
Residential tenancies are also governed by specific legislation in each jurisdiction (eg the Residential Tenancies Act 1987 (NSW)) and residential tenants have many statutory rights, so specific advice should be sought.
Last modified 31 Aug 2020
There are two ways in which a tenant can continue to occupy the relevant real estate when a commercial lease has expired. Firstly, it is common for a lease to contain an option for the tenant to renew the lease for an additional term, however, this must be negotiated between the parties.
Alternatively, a lease may contain a holding over clause which allows tenants to occupy the leased premises on the basis of a monthly tenancy once the lease term has expired, terminable by either party on a month’s notice. However, where the landlord does not consent to the tenant continuing possession past the expiry of the lease, the landlord is entitled to immediate possession of the leased premises.
Last modified 31 Aug 2020
Most leases provide that the tenant must vacate the premises on or before the expiry date (subject to any option to renew or holding over provision). If the tenant does not vacate, the tenant is considered a trespasser and the landlord can take immediate action to have the tenant removed.
Last modified 31 Aug 2020
Generally no, unless there has been a breach of the lease, or there is a specific term of the lease permitting early termination.
In situations where the tenant has breached a non-essential term of the lease, the landlord may issue a notice of breach and, if the breach is not rectified within the time frame specified by the lease and recorded on the notice, the landlord may terminate the lease. Breach of an essential term of the lease may, in certain circumstances, entitle the landlord immediately to terminate the lease by notice or by re-entry.
Where the landlord becomes entitled to repossess the property, it may generally do so either by an express power of re-entry under the lease or by obtaining a Court order for possession. The landlord may need to consider any notice requirements made under the relevant State legislation.
Australian courts and tribunals will usually allow tenants relief from forfeiture of the lease and allow them to rectify breaches of the lease and retain possession of the premises, except in the most aggravated circumstances. For example, if the tenant pays any rent arrears then the court will normally allow it to remain in the premises and exercise any option for a further term, unless there is a long history of rent arrears.
Last modified 31 Aug 2020
There are situations where a lease can be terminated by some statutory body or other authority and not by a party to the lease eg by resumption, which is a compulsory purchase. State authorities have certain rights to acquire property on a compulsory basis, including leased property. The tenant is generally entitled to remain in occupation of the leased premises until compensation is paid by the State authority to the dispossessed owner. A tenant may also be entitled to compensation in certain circumstances if the tenant can establish a legal or equitable estate or interest in the land.
Last modified 31 Aug 2020
The most common forms of security provided to a landlord to protect against a failure by a tenant include security bonds, bank guarantees and personal or company guarantees. Security bonds are commonly used in residential leases and may be used in small-to medium-sized premises under commercial leases. Bank guarantees are commonly used in commercial leases. Guarantees, which are also commonly used in commercial leases, should be evidenced in writing.
Last modified 31 Aug 2020
Leases normally specify the permitted uses of premises. Certain activities which may cause a nuisance are prohibited and tenants are also subject to any usage restrictions laid down by planning (zoning) regulations. However, such usage restrictions may vary between local planning authorities within each Australian state jurisdiction.
Last modified 31 Aug 2020
Unless the tenant is allowed to carry out specified work in the premises as set out in the lease, any alteration to the premises, major or minor constitutes a breach of the covenant for repair. Most leases limit a tenant's right to alter or improve leased premises. Structural alterations are frequently prohibited, particularly where the tenant only leases part of the building. Non-structural alterations normally require the landlord's consent.
Last modified 31 Aug 2020
A tenant is able to transfer its leasehold right to occupy the real estate to a third party through an assignment of the lease to a third party or a sublease of the existing lease to a third party as a subtenant. In most cases, the consent of the landlord to an assignment or sublease is required.
An assignment of the lease involves transferring the benefit of the landlord's obligations under the lease and renders the assignee liable under the lease.
Alternatively, where the lease provides for it and with the landlord's consent, it is possible for a tenant to sublease the existing lease to a subtenant.
Last modified 31 Aug 2020
It is common practice for leases to contain a clause providing for annual rent reviews. Such clauses tend to account for inflation or movements in the average market rent.
Last modified 31 Aug 2020
Changes or increases in rent payable are determined as set out in the lease, as modified by retail leasing and residential leasing legislation, if applicable. The methods of review used include fixed annual increases, market rent review by agreement or in default, by determination by an expert, by arbitration or valuation and movements in line with the Consumer Price Index figure published quarterly by the Australian Bureau of Statistics.
Last modified 31 Aug 2020
In Australia, VAT is called the Goods and Services Tax (GST) and the current rate of GST charged on taxable supplies of goods and services is 10 percent. The supply of a commercial or retail lease is deemed a taxable supply and the landlord will need to charge GST on the rent and other consideration received from the tenant and will then need to remit the GST received from the tenant to the Australian Taxation Office.
In the case of commercial or retail leases, tenants that are registered for GST are entitled to claim tax credits for the GST that they pay on the rent and other consideration to the landlord. However, this is subject to suitable provisions being contained in the lease and also subject to the landlord being registered for GST.
Last modified 31 Aug 2020
It is common practice for tenants to be liable for stamp duty, registration fees, mortgagee consent fees and head lessor consent fees. Liability for costs associated with the preparation and negotiation of the lease or agreement for lease and the landlord’s legal costs can be negotiated between the parties and will depend on the bargaining power of the parties, although they are not recoverable from retail and residential tenants.
All jurisdictions no longer require payment of stamp duty on leases (unless a lease premium is payable). Registration fees are usually less than AUD200 but there can be further costs associated with ensuring the documents are in registrable form. For example, in South Australia, a survey lease plan, prepared by a surveyor, must be attached to the lease for registration. Mortgagee consent fees can range from AUD300 to AUD600 and head lessor consent fees can be several thousand dollars as they usually include lawyers’ fees.
Last modified 31 Aug 2020
It is standard practice in commercial leases for the landlord to be liable for the maintenance and repair of areas used by multiple occupiers. The landlord's liability is usually an express provision in the lease requiring it to carry out repairs in the building and maintain and repair the common areas of the building.
It is common for the landlord to be reimbursed for such expenses by charging tenants for outgoings. The percentage of outgoings payable by a tenant will consist of an amount based on the size of their leased premises in relation to the entire building's gross rentable space.
Last modified 31 Aug 2020
In general, the tenant will not be responsible for structural repairs, inherent defects and fair wear and tear of the real estate they lease. The landlord may or may not be liable for these repairs depending upon the terms of the lease. Tenants tend to be liable for any repairs in relation to damage caused by the tenant and to be under an obligation to repair and maintain the leased premises.
Last modified 31 Aug 2020
Tenants under commercial and retail leases tend to arrange and pay for their own utilities and telecommunications directly from the suppliers where they are able to obtain a separate connection. Otherwise, the landlord can arrange to supply the utilities and telecommunications and on-sell these services to the tenant.
Last modified 31 Aug 2020
In relation to the cost of insuring the structure of a building the landlord under the lease will generally be responsible for taking out such insurance (but would normally pass on the cost to the tenant as part of the charge for outgoings). Policies are usually taken out for the replacement value of the building/premises and cover usual risks such as fire, storm, malicious damage or earthquake etc.
The tenant will normally be responsible for obtaining the necessary insurance policies for its business and property (such as public liability insurance) pursuant to its lease obligations and will often be required to reimburse the landlord’s costs of insuring as part of the building’s outgoings.
Last modified 31 Aug 2020
Is VAT charged on rent?
In Australia, VAT is called the Goods and Services Tax (GST) and the current rate of GST charged on taxable supplies of goods and services is 10 percent. The supply of a commercial or retail lease is deemed a taxable supply and the landlord will need to charge GST on the rent and other consideration received from the tenant and will then need to remit the GST received from the tenant to the Australian Taxation Office.
In the case of commercial or retail leases, tenants that are registered for GST are entitled to claim tax credits for the GST that they pay on the rent and other consideration to the landlord. However, this is subject to suitable provisions being contained in the lease and also subject to the landlord being registered for GST.
Last modified 31 Aug 2020