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COMMERCIAL CONSIDERATIONS OF A RETAIL LEASE
A lease is not just about paying the lowest rent. There are numerous matters to consider.
Some factors in determining the rent are:
The area to be leased
In most areas you should be able to obtain from a knowledgeable leasing estate agent a range of rents per square metre for comparable properties.
You should ask the agent or landlord for a copy of any plans or survey for the property to:
Condition of the premises
The condition of the premises will determine the rent to be obtained. For example, is the building in need of refurbishment? Will you or the landlord make some improvements to the building? Are you required to repaint or refurbish the premises during the term of the lease or when the lease expires?
Be very wary of demolition or refurbishment clauses i.e. clauses that provide you must vacate if the landlord decides to demolish or refurbish the shop or centre.
Sometimes fitout is left behind by a previous tenant. You may be prepared to pay higher rent to obtain the shop to avoid your own expenditure on fitout of the shop.
You may not wish to have an obligation at the end of the lease to remove fitout and restore the shop to the condition when the lease began.
Some leases provide for no outgoings to be payable by you while other leases make outgoings payable in addition to rent.
If the lease does not allow the landlord to recover outgoings and outgoings increase substantially, the landlord may receive less in the hand after payment of the outgoings.
If the lease requires outgoings to be paid by you and outgoings increase, the amount payable by you increases. The landlord therefore receives the full rent without any deduction.
Sometimes the landlord may need to offer an incentive to attract you, eg, a rent-free period or some fitout. You should get professional advice on your tax liability as some incentives are taxable and some are not taxable.
The type of rent reviews may affect what a landlord is prepared to offer you at the beginning of a lease.
The Retail Tenancies Reform Act, which applies to retail leases, makes it illegal for a lease to contain a clause which prevents the rent decreasing on a market review or if the Consumer Price Index falls. This type of clause is commonly called a 'ratchet clause'.
There are three basic methods of rent review.
Method 1 - Consumer Price Index
Rent is increased in accordance with increases in the nominated Consumer Price Index which is the most widely accepted measure of inflation. CPI is measured in Australia in each of the States and in Australia generally so it is important to specify which index applies.
Method 2 - Market review
Rent is increased to the market rent of similar premises in the area. Usually this is done by agreement between the landlord and tenant but if they cannot agree it is determined by an independent valuer. A market review is based on comparable properties in the area and does not take into consideration any goodwill you may have created in respect of the premises because of your use and business.
Usually a landlord wants a market review at some time in a lease of more than three years to ensure that the rent does not fall below market for a long period of the lease.
If the landlord agreed to a lower rent than market rent as an incentive to enter into the lease when the rent is later reviewed to market it will be increased the actual market rent at the time. This may represent a very high increase in the rent. For example if the shop is in a new centre the landlord may give the first occupants a lower rent, when the time comes to review the rent to market the centre may be particularly popular and command high rents. The market review will be to the price the centre is commanding at the time of the review, which may be a very large increase in a low rent that has only been increased by the CPI for a number of years.
If you have this type of incentive it is a good idea to put a ceiling on the percentage the rent can increase on market reviews.
Method 3 - Fixed increases
The rent increases to an agreed amount at agreed times.
This method provides you with the benefit of certainty of increases. In some situations those agreed increases may be less than or greater than CPI increases or market rent increases.
Costs Associated with a Lease
There are a number of costs associated with the preparation of and entering into the lease including:
1. Legal Fees
It is common for you to pay the legal fees of the landlord's solicitor in preparing the lease. However this is a matter for negotiation between the landlord and you. Generally where the legal fees can be passed onto you they are charged at an amount of $400.00 plus 1% of the rent averaged over the term of the lease. There are normally some other out-of-pocket expenses also totaling $100-$150.
If you decide to use a solicitor to act for you in respect of the lease always get a quote. You will usually be charged at an hourly rate. In most instances solicitors record their time and charge in 6 minute units.
2. Stamp Duty
You are liable for the payment of stamp duty on the lease. Stamp duty is assessed at $0 .35c per $100 of the total amount of rent and outgoings payable over the term of the lease.
In most instances the landlord requires the signed lease to be returned to them with a cheque for the costs and disbursements, as agreed, together with the stamp duty. Sometimes the landlord requires the tenant to return the lease to them stamped. As stamping the lease requires the signing of a statutory declaration and a trip to the Office of State Revenue it is best to insist the landlord be responsible for stamping the lease.
Building improvements required to be made by you as part of the landlord's obligations under the lease may also increase the liability for stamp duty.
3. Mortgagee's consent & production fees
A consent by the landlord's financier or mortgagee is normally required to register a lease. Mortgagees generally charge to give their consent. The landlord will try to pass this cost onto you however it is a matter of negotiation. If you are required to pay for the mortgagee's consent ask how much it will cost. Usually banks and other lending institutions charge $250 or more to give their consent to a lease.
The landlord may be in breach of its mortgage and perhaps the lease if it fails to obtain mortgagee's consent. If there is a mortgage over the premises the lease cannot be registered without the mortgagee's consent and production of the title.
4. Registration fees
Leases can be registered at the Land Titles Office in Melbourne.
If the lease is registered it is entered on the title to the shop. This is an important protection for the tenant.
The certificate of title must be lodged with the lease to allow registration to occur. If the shop has a mortgage over it, the mortgagee will need to produce the certificate of title to allow registration to occur.
If the shop is mortgaged, the landlord's mortgagee will charge (in addition to its fees for consent) to produce the Certificate of Title to allow registration of the lease to occur. The landlord will try to pass this cost onto you, however, this is a matter for negotiation.
When the lease is registered you should receive a copy showing the registration number. If you have not received a copy one month after you have signed the lease and returned it to the landlord or its solicitor for stamping and registration then chase them for a copy.
This Information Outline is provided courtesy of McKean & Park Lawyers & Consultants who are experienced in this area of law. They are located at 405 Little Bourke Street MELBOURNE VIC 3000 or call them on (03) 9670 8822 if you would like more information on the legal topic, or you wish to obtain formal advice regarding your situation.
McKean & Park was established in 1863 by James McKean and thrives today with 20 professionals specifically in all major areas of practice including Workplace Relations and Anti-Discrimination Law. The firm is proud of the fact that many of its Lawyers are accredited specialists approved by the Law Institute of Victoria. McKean & Park is committed to providing clients with comprehensive and innovative legal services delivered promptly in a professional and cost effective way.
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