Understanding the fundamentals of Commercial Leases (Non-Retail)

Mr and Mrs Joe Bloggs contacted me to seek legal advice on a proposed commercial lease provided by the real estate agent for their upcoming coffee shop in suburban Perth. Mr and Mrs Bloggs were being rushed into signing the proposed lease, which they were not comfortable with. They started telling me as to how their friend, who runs a hair dressing salon, was provided with extensive written information and a proposed lease to review before executing it in comparison with a small seven-page template that they received by way of a proposed lease. I explained to Mr and Mrs Bloggs that their friend and they are subject to separate leasing legislation, however their due diligence before signing the proposed lease will assist them in the long run. A summary of the safeguards that a potential lessee of a commercial lease must consider is discussed below.

In Western Australia, leases for commercial premises can be categorised as retail leases and commercial leases.

Retail Leases

Retail leases are governed by Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA) (the “Retail Shops Act”) and are limited to premises:

(a)       with a lettable area of 1,000 m2 or less;

(b)       used for carrying on a business and that are in a retail shopping centre (a group of premises, 5 or more) or otherwise; and

(c)       used for the sale of goods by retail or a specified business.

As at 1 January 2013, 'specified businesses' are limited to:

(a)       dry cleaning;

(b)       hairdressing;

(c)       beauty therapy and treatments;

(d)       shoe repair (which includes key cutting and engraving); and

(e)       sale or rental of videos tapes, DVDs, electronic games and other similar amusements.

Any landlord, whose commercial premises is governed by the Retail Shops Act, is bound by significant number of obligations as to the information he/she needs to disclose to a potential lessee prior to executing the lease. In comparison landlords, whose premises is governed by the Transfer of Land Act 1893 (WA) and the Property Law Act 1969 (WA), are not bound by any specific obligations as to the information he/she needs to disclose to a potential lessee prior to executing the lease.

The Retail Shops Act did not apply to Mr and Mrs Bloggs proposed lease. Therefore, began Mr and Mrs Bloggs’ due diligence journey before executing their commercial lease.

Commercial Leases

The real estate agent provided Mr and Mrs Bloggs with two documents – the Commercial Lease with Annexures and General Terms and Conditions of the Lease. Mr and Mrs Bloggs were seeking advice as to whether both these documents captured the terms and conditions of the agreement between the landlord and them.

Typically, most real estate agents would fill in the details in a Commercial Lease template published by Real Estate Institute of Western Australia (REIWA) and provide it along with the General Terms and Conditions of Lease, also published by REIWA, to any potential lessee.

The General Terms and Conditions of Lease document sets out the obligations and liabilities of the landlord and the potential lessee, however any potential lessee must review whether the following key details have been included in Commercial Lease document provided to him/her:

(a)       whether the potential lessee and the landlord have been accurately identified (is the potential lessee and/or the landlord an individual or a company);

(b)       whether any guarantors have been included in the lease;

(c)       whether the premises has been accurately described with details of the Certificate of Title;

(d)       whether any other items (such as equipment) owned by the landlord are being included with the lease;

(e)       the term of the lease;

(f)        whether the potential lessee has an option or multiple options to renew the lease;

(g)       the amount of rent and the frequency of payment of rent;

(h)       the mechanism and frequency of rent review;

(i)         what are the types of outgoings that the potential lessee is to pay and an estimated amount per month;

(j)         whether a security deposit or bank guarantee will be held and for what amount;

(k)       permitted use of the premises;

(l)         whether the landlord has obtained approvals for the intended use and signage from the local council and the strata management (if applicable);

(m)      whether the potential lessee has been provided with copies of approvals for intended use;

(n)       insurance requirements to be complied with by the potential lessee; and

(o)       how the agreement can be terminated and what is the notice period.

Mr and Mrs Bloggs proposed lease document had the following inadequacies:

(a)       incorrect details of the proposed lessee – Mrs Bloggs was named as a lessee in place of the potential lessee company;

(b)       the landlord had not obtained any approvals from the local council and the strata management for the intended use and signage although the terms stated otherwise;

(c)       no estimate of the outgoings was set out in the proposed lease document

If Mr and Mrs Bloggs would have signed up a lease with the inadequacies mentioned above, they would have put themselves in a financial predicament as the incorrect person would have been bound to comply with terms of the lease without any approvals to run the business at the premises and with no estimate of the costs towards outgoings.

 Takeaway Message

Caveat emptor – buyers (in this case potential lessees) beware:

The clear message for any individual or entity considering a commercial lease is to undertake adequate due diligence and independent legal advice before executing any commercial lease.