Looking ahead for landlords

A retail or commercial lease is often for a very long period of time – typically several years. This means that it is important for you, as a landlord, to consider not only the initial term of the lease, but also whether entering into a lease for a long term might have an impact on the future potential for the premises.

It can be difficult to consider how things might look in a few years’ time. A good lease will include solid boilerplate provisions to account for most changes in circumstances. However, some things simply must be prepared for in advance, and by doing so you can ensure that you do not accidentally stymie your own future plans.
We discuss some of the matter you should consider below.

Are you likely to sell the premises during the term of the lease?
The capacity of a commercial property to earn an income is one of its largest selling points. For this reason, some landlords prefer to have their lease registered on title (and indeed, in some circumstances it is mandatory to do so). By registering your lease on title, the lease is a matter of public record, and any prospective buyer can easily see that a lease exists and what its terms are, and have confidence in what they are purchasing.

Another factor worth considering is whether the existence of option terms in your lease may potentially deter future purchasers for the land, who may want to occupy the premises for their own business, or may want to develop the land.

Term and Options
Most commercial leases tend to have terms ranging from one year to five years – with some exceptions. Some leases then include “option periods”, permitting the tenant to require the landlord to enter into a new lease on specific terms.

Contrary to popular belief, the granting of more option terms does not necessarily equate to greater financial security or increase in property value for a landlord. The granting of option periods places control in the hands of the tenant. It does not compel the tenant to enter into a new lease term – it puts an obligation on the landlord to grant a new lease term if the tenant requires it. It can be desirable to offer option terms in leases in some cases, because doing so may attract quality long-term tenants who are seeking stability and certainty.

Rent Review
You should carefully consider how you intend to approach rent reviews in your lease, as the decision you make now could well bind you for many years to come. The most common means of rent review are CPI adjustment, fixed percentage increase, or market review.

CPI rent reviews ensure that your rent keeps pace with general increases in prices over time. However, general increases in price over time may not be an accurate reflection in the increase in value of your premises. This can mean that CPI increases in rent under realise the value of your premises. It can also expose you to uncertainty, as CPI fluctuates each year.

Fixed percentage increases can be more attractive, as they provide certainty as to what your rent will be at any given time. However, for the same reason, it is possible that you may under-realise or over-realise the rental value of your property.

For those reasons, occasional market reviews are often desirable at certain intervals – often at the time an option is exercised. Many market review clauses allow the landlord to nominate a new market rent, and then allow the tenant to either agree of refuse. If the tenant refuses, it is generally the case that an independent valuer is appointed to fix the new rent.

Redevelopment and Demolition
Many leases, and the leases legislation, consider what must happen if a landlord wishes to demolish the building or redevelop their land while leases are on foot. As a general rule, it is better to avoid having any long term active leases in place if you are considering undertaking a significant redevelopment of your property.

In such circumstances it is especially important to ensure you get proper legal advice, as your rights in this area may be affected by legislation. Some (but not all) leases in NSW or the ACT may be affected by the Retail Leases Act 1994 (NSW) or the Leases (Commercial and Retail) Act 2001 (ACT). These acts include provisions which affect your rights and your responsibilities to your tenants if you intend to demolish or redevelop land while you have active leases over parts of it.

Additional tenants right - ACT
The Leases (Commercial and Retail) Act 2001 (ACT) imposes some additional special considerations for landlords in the ACT. It is important to remember that many, but not all, commercial and retail leases in the ACT are affected by this Act.
Under s 108 of the Act, the tenant may have a right to be given a preference for renewal at the end of their lease if their premises are located in a “shopping centre”, as defined in the Act.

Further, s 104 of the Act provides that tenants have a right to require the landlord to extend the term of their lease to 5 years if the term of the lease (including options) is less than that period.

These two rights may be waived by tenants at the commencement of the lease, if they obtain independent legal advice, and their lawyer signs a certificate confirming that they advised them about these sections and they agreed to waive these rights. If the exercise of either of these rights by your tenant would interfere with your plans for the premises, it is important that you insist on these certificates being provided at the time the lease is signed by the tenant.

If you are a landlord considering entering into a new lease with your tenants, send us your enquiry or call Elringtons Commercial Leasing team on 6206 1300 to discuss how we can help you plan your new lease