If you’re party to a commercial lease that is coming to an end, whether you’re a landlord or tenant, it’s important that you be aware of any ‘make good’ obligations that are part of the lease.
If your lease has a make good clause, it’s important that you understand your obligations, whether it is limited to leaving the premises in good repair, or reinstating to a specific condition, and whether you can avoid the obligation by paying a sum of money, which can provide both landlord and tenant with flexibility. If a lease specifies that the condition of the premises in question ought to be reinstated, or made good, it is probably the case that you will need to comply.
Even in these circumstances, you may not be liable for the total cost if there isn’t a reduction in value of the premises. This is because pursuant to common law, the landlord is only entitled to recover any consequential reduction in value from failing to undertake the reinstatement.
Additionally, in Queensland, section 112 (1) of the Property Law Act 1974 provides that, where a lease requires a premises to be left in good repair at the end of a lease, any recovery is limited to the reduction in value of the premises.
It is especially important to make note and take photos of the condition of the premises at the start of the lease in these circumstances so that all parties can be satisfied of the initial condition, whether a tenant is or isn’t required to make good, it remains important.
The number one tip and consideration is to carefully negotiate the relevant make good requirements at the time of negotiating the lease. Parties are often so excited and focussed on the commencement of the lease, that they omit to take into consideration what the ‘end’ will look like, or they categorise it as a future concern. But when the time comes, if you are required to make good pursuant to the lease, it could impose a number of unintentional onerous conditions on you.
If you’re unsure whether you need to comply with any ‘make good’ conditions that may be in your lease, or want assistance to negotiate reasonably terms at the time of construction of the lease, the team at Enterprise Legal can help you determine the best course of action for you. For the best outcome, call us early in the process:
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At Enterprise Legal, we always say that ‘prevention is better than cure’. So when it comes to commercial, industrial or retail lease disputes, the best way to prevent them is to ensure you understand what you are signing up for in the first place and to negotiate some protections at the time of entering into your lease. After all, a lease is typically one of the biggest financial obligations that your business may need to commit to, keeping in mind that you are usually committed to your obligations for a minimum of three or five years!
Whether you’re a Landlord or Tenant, here are our top five tips to keep in mind when entering into your next lease:
Quite often, before a lease is prepared, the parties will sign a short document or letter outlining the key terms of the deal. This document is usually referred to as a ‘Heads of Agreement’ or ‘Offer to Lease’ and is often prepared by the real estate agent managing the deal.
Although usually an Offer to Lease is not binding on the parties, it forms the basis of the formal lease terms. This stage of lease negotiations is the best time to negotiate key terms, before either party incurs the expense of preparing and negotiating formal lease documents. If either party seeks to amend terms that are agreed in a Letter of Offer after formal lease documents have been prepared, it can create friction between the Landlord and Tenant at a very early stage in their association.
We recommended that you seek legal advice on the terms of an Offer to Lease, to ensure a smoother lease negotiation process and to avoid the potential for a dispute.
A frequent issue in lease negotiations is whether a Tenant will have the exclusive right to operate their business type (specified as the ‘permitted use’) in the centre/complex. This means that it’s very important for a Landlord to consider whether any Tenant’s proposed use conflicts with any rights the Landlord has already given to existing Tenants in the centre/complex.
A more commonly overlooked issue around permitted use is which party is responsible for ensuring that the intended use can lawfully be conducted from the premises. The widely accepted position in leasing matters is that the Tenant is responsible for all aspects of ensuring their intended use can be carried out from the relevant premises. A Landlord will typically include protections in the Lease under which the Landlord expressly states they do not warrant or guarantee that the premises will be fit for the Tenant’s intended use, and further that the Tenant is obliged to obtain all necessary consents/approvals (i.e. liquor licences, council approval etc) to run their business from the premises.
Landlords should always ensure this protection is included in their Lease and Tenants should understand that it is a matter for them to ensure that the premises will be fit for their specific purpose. To avoid disputes, a Tenant should make enquiries early (prior to signing a lease!) to ensure they can lawfully conduct their business from the premises. Failure to do this can result in having to comply with notices from applicable authorities (eg. Council), which can be extremely expensive!
Another common area of dispute relates to responsibility for fixing certain equipment (such as air-conditioning equipment) in the premises if they need repairing.
A lease should cover off on the responsibility of the parties to maintain equipment, and to repair/replace it when it breaks. Typically, a Tenant is responsible for ‘wear and tear’-related repairs, whereas a Landlord will be required to attend to all repairs or replacement that are of a ‘capital nature’ provided that the Tenant has regularly serviced or maintained that equipment during the Term and has not deliberately or wilfully contributed to the damage. However, that will not always be the case and it is important that both parties check the relevant clauses in their Lease to understand their obligations. It is also beneficial (especially for the Tenant) to take steps to understand the condition of any relevant equipment (such as air conditioning) at the time of entry into the Lease.
Tenants in particular should always consider the specific wording of any clause in their Lease that deals with insurance obligations, to ensure the Landlord’s requirements will be commercially acceptable to the Tenant, especially in light of their intended business use.
Some practical examples are:
Landlords of multi-tenant centres or complexes (eg. shopping centres or strip-malls) typically include clauses which give them the right to relocate Tenants to comparable locations within the centre/complex, or to redevelop or demolish part of all of the centre/complex.
Tenants should always carefully consider the specific wording of these clauses and the practical implications. At a minimum, the clause should stipulate that any relocation must be to a comparable location and it should deal with how the rent will be treated in those circumstances, but as a further step, the Tenant should consider whether they want to (where practical) have the right to return to the original location. It is also important to contemplate who will be responsible for the costs of the Tenant’s fit-out in the new location in these circumstances.
A well drafted and well-understood lease will go a long way to avoiding a dispute arising between the Landlord and the Tenant. To avoid a costly dispute, engage the expert Enterprise Legal Business Law team to help you with your next lease negotiation:
So you have followed our top tips for entering into a commercial or retail lease, but things haven’t exactly gone to plan. How do you know what the next step is? And how do you know when it is time to get expert lawyers involved?
At Enterprise Legal, it is our view that most disputes are best handled early on before little problems become big problems. Whether you are a landlord or tenant, the best way to resolve a lease dispute is to ensure that it is handled properly from the start.
The following are ‘red flags’ that indicate that it’s likely time to chat with the Enterprise Legal team:
If you are a tenant and have been issued with a Notice to Remedy Breach, stop what you’re doing and come chat to a lawyer! Breach notices need to be issued in a particular way to be valid under law, and the reality is that most landlords (and even some lawyers) don’t get this right. If a Notice is incorrect, it will likely be invalid. If you engage a lawyer at this point not only can you ensure that any issues with a Notice can be resolved, but you may also find that your lawyer can help you negotiate an outcome with your landlord.
If you are a landlord and need to issue a Notice, don’t go at it alone! It is so easy to make a mistake when preparing and issuing a Notice to Remedy Breach so it is worth engaging a lawyer so that you can ensure that everything is correct. If a Notice is not valid you will ultimately end up spending more time and money than you would have if you had a chat to a lawyer to begin with.
While disagreements between parties may just seem like straightforward interpersonal concerns at first, we all know that these things can escalate quickly! By chatting to a lawyer early on, you may be able to resolve your concerns, put your mind at ease, and ultimately avoid a prolonged dispute. Sometimes a simple letter from a law firm can make a real difference. If it doesn’t, you will have a record of your concerns and can point to your attempts to resolve issues later on down the track, which will assist your prospects significantly!
Landlords - hold your horses! Locking out a tenant is pretty serious, and you need to make sure that you have followed the appropriate steps before you escalate matters. If you don’t, you are at a real risk of ‘repudiating’ the lease (which is bad!) and being liable for the tenant’s damages.
Tenants, if you are locked out, it is time to chat to a lawyer pronto! You do have options here, including obtaining an injunction to regain access to the premises. If you are unlawfully locked out, you may be entitled to claim damages from your landlord or claim that they have repudiated the lease. Either way it is imperative to make sure that you act quickly!
If you want to terminate your lease early, there may be options available to you. If you want to terminate and minimise your risk, you’re going to want to speak with a lawyer first to work out how to properly terminate your lease, minimise your risk, and perhaps even resolve the concerns leading to termination of the lease.
Maybe something relating to your lease just doesn’t feel right and you want to get a sense as to whether it’s okay or not. The law is a confusing beast, and without the experience and expertise of a lawyer, it might not always be clear if something is okay and if you can proceed. If you are ever unsure, it may be a sign that it is time to chat to the Enterprise Legal team. If something is amiss, we will be able to quickly identify any issues and whether something can be done, or alternatively be able to set your mind at ease.
While you can’t always avoid a dispute, the best way to avoid significant costs and a lengthy legal battle is to act quickly. To resolve your concerns swiftly, engage the expert Enterprise Legal Disputes team to help you with your lease dispute.