3 FAQ's from Victorian retail leasing tenants

The following are typical of the FAQs we receive from tenants:

1. I have been given a Letter of Offer to lease retail premises by the landlord’s real estate agent.  What should I do now?
   

   Ideally, you should not sign the Letter of Offer before:

   1. conducting physical due diligence of the building structure and the landlord’s fixtures, plant and equipment contained within it.  In this regard, we recommend a building report be obtained from a qualified tradesperson.  Similarly, a suitably qualified tradesperson should inspect all landlord fixtures, plant and equipment within the premises, such as air-conditioning, for example.  Any problems arising out of those reports should be dealt with as amendments to the Letter of Offer, requiring the landlord to rectify those problems prior to the commencement of the Lease; and
   2. speaking to a retail leasing lawyer.  The lawyer should conduct legal due diligence of the premises and the landlord and advise you on the terms of the proposed Lease as described in the Letter of Offer.   If necessary, the lawyer may be able to negotiate any changes you may require to the Letter of Offer before it is signed.   The lawyer should also advise you on whether the Letter of Offer constitutes a binding agreement to enter into the proposed Lease. Many Letters of Offer we see require tenants to pay significant deposits to the landlord’s agent. Those deposits may be jeopardised if the tenant does not proceeding with the Lease after having signed the Letter of Offer.
2. After signing a Letter of Offer, I have been given copies the landlord’s Disclosure Statement signed by the landlord and Lease documents for execution.  What should I do now?
    
   Ideally, you should provide the documents to a retail leasing lawyer to:
   
    
   1. ensure the terms of the documents correspond with what you have agreed to in the Letter of Offer and to check the terms of the documents against the requirements of the Retail Leasing Act 2003 (Vic) (RLA);
   2. advise you on the wider legal terms of the Lease which were not mentioned in the Letter of Offer;
   3. seek amendments to the terms of the documents which do not correspond with the Letter of Offer,  the RLA  or your understanding of how you will occupy the premises; and  
   4. advise you on the tasks you (as the incoming tenant) may need to undertake before you can take possession of the premises, which may include:
      1. obtaining the landlord’s approval to any proposed fitout;
      2. the provision of a cash security deposit or obtaining a bank guarantee (and complying with the requirements for bank guarantees under the terms of the Lease); and
      3. obtaining public liability insurance coverage which complies with the insurance requirements of the Lease (which will usually include noting the landlord’s interest as an insured party on the insurance policy);
   5. assist with the timely execution and return of the Lease documents to the landlord’s agent; and
   6. seek from the landlord the return of the fully executed Lease documents and, where relevant, the consent of any mortgagee on title to the grant of the Lease by the landlord.
   
   
   
   
3. I have entered into a Lease and have taken possession of the premises.  Is there anything more I should do concerning the Lease?
   
   
   Yes, at a minimum you should:
1. ensure you and your employees comply with the various obligations applying to the tenant under the Lease document;
2. ensure that you and your employees comply with the tenant’s obligations under any building rules which might apply (where the premises are located within a larger building: for example, a shopping centre);
3. diarise the last day you can exercise any option to renew the lease for a further term (noting that if you exercise the option after that last date, the landlord might not be obliged to extend or renew the Lease);

If you would like assistance with your retail leasing, please contact Andrew Bini, Senior Commercial Lawyer at Nevett Ford Melbourne.

 

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Renewing Victorian Retail Leases

Where a tenant has an option for a further term granted to it under the terms of a lease (or a subsequent deed varying the lease), in the majority of cases for standard commercial (non-retail) leases it is the tenant that takes the first step in exercising the option.  

For the exercise of the option to be valid, the option must be exercised within the option exercise period defined in the lease.  If the tenant exercises its option outside the option exercise period, the landlord is generally not obliged under the terms of most leases to renew the lease for the further term, and the lease will terminate at the end of the current term.

However, for leases of “retail premises” governed by the Retail Leases Act 2003 (VIC) (Act), the landlord is required to act first.

As mentioned in our earlier blog on 13 October 2016, Section 28 of the Act provides:

• If a lease contains an option exercisable by the tenant to renew the lease for a further term, the landlord must notify the tenant in writing of the date after which the option is no longer exercisable (Last Date for Exercising the Option).  That notice (Notice) is to be given at least 6 months and no more than 12 months before the Last Date for Exercising the Option. 


• However, the landlord is not required to provide the Notice if the tenant exercises or purports to exercise the option before receiving the landlord’s Notice;


• If the landlord fails to provide the Notice to the tenant within the required timeframe, the lease is taken to provide that the Last Date for the Exercising Option is extended to a date which is 6 months after the date landlord provides the Notice to the tenant (Extended Last Date);


• If the Extended Last Date occurs after the expiry date of the current term set out in the lease, the lease continues until the Extended Last Date; 


• If the tenant exercises the option prior to the Extended Last Date, the new lease commences at the expiry date of the old lease, rather than the total term of the lease being extended.

Consequently, an unplanned extension of the option exercise period may occur where a landlord fails to provide, or is late in providing, the Notice to the tenant.

For tenants, however, it would be prudent to formally exercise their option for a further term within the option exercise period, rather than wait for the landlord to serve the Notice.  Section 28 does not prevent tenants from the exercising their options prior to receiving the Notice.

In circumstances where:

1. a retail leasing tenant has failed to exercise its option for a further term within the option exercise period recorded in the lease; and


2. the landlord has indicated that it is not willing to accept the tenant’s exercise of its option outside that option exercise period, and has required the tenant to vacate the premises at the end of the current term.

Section 28 may provide a solution (by extending the Last Date for Exercising the Option) if the landlord has not served the Notice on the tenant.

If you require assistance regarding exercising an option under a retail premises lease in Victoria, please contact Andrew Bini, Senior Commercial Lawyer, Nevett Ford Melbourne. 

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Landlords and Essential Safety Measures

We often receive enquiries from landlords and tenants concerning essential safety measures obligations and whether it is the landlord or the tenant who must comply with those obligations.

Essential safety measures (ESM) are defined in Part 12 of the Building and Regulations 2006 (Vic) and are essentially a broad range of obligations ranging from sprinkler and air-conditioning systems, fire extinguishers, exit signs and compliance inspection, reporting and maintenance.

Until May 2015 there was much confusion in the property industry over whether a landlord could require a tenant to comply with the ESM provisions.  Many existing lease documents attempted to make it the tenant’s responsibility for complying with and bearing the cost of compliance with the ESM provisions. However, even if existing lease documents do allocate responsibility for compliance, the position has since been clarified by the VCAT Advisory Opinion (Building and Property [2015] VCAT 478) opinion handed down on 1 May 2015 (Opinion).

Summary of the Opinion

The Opinion was sought to clarify, amongst other issues, who (landlord or tenant) is responsible for the cost of complying with Section 251 of the Building Act 1993 (Vic).

Section 251 of the Building Act provides:

• if the owner of a building or land is required under the Building Act 1993 (Vic) to carry out any work or do any other thing and the owner does not carry out the work or do the thing, the tenant of that building or land or any mortgagee may carry out the work or do the thing; and

• a tenant may recover any expenses incurred by it from the owner as a debt due to the tenant and deduct those expenses from or set them off against any rent due to the owner. 

The main points in the Opinion are:

1. if a landowner is required to undertake work or do a thing under Sction 251 of the Building Act 1993 (Vic) and related provisions in the Building Regulations 2006 (Vic) (Building Act) including ESMs, the cost of undertaking that work or doing that thing must be borne by the landowner.  This applies to leases regulated by the Retail Leases Act 2003 (Vic)(RLA) and leases outside the scope of the RLA , such as commercial leases; and
   
2. for some obligations the landlord may agree with the tenant for the tenant to meet the requirements, but at the landlord’s expense.

Status of the Opinion

While the Opinion is not binding on courts or tribunals, it will clearly influence VCAT Members and Judges of the Magistrates’ Court, County Court and the Supreme Court.

On that basis:

1. landlord’s should consider the Opinion as being a statement of the law which will be applied by VCAT and the Courts;
   
2. landlords should not charge ESM outgoings to tenants;
   
3. and landlords should reserve their right to charge ESM outgoings to tenants at a later date, should the Opinion not become law.

Recovery of ESM Outgoings by Tenants 

There is commentary that some tenants are considering whether they have claims against landlords for ESM outgoings that have been incorrectly paid by tenants.  It is suggested that only tenants who have substantial claims which justify taking action may consider seeking reimbursements of those amounts from landlords.

However, landlords should not automatically repay such amounts without considering:

1. the effect of Statute of Limitations which limits claims back to six (6) years;
2. whether in fact, it is commercially viable for the tenant to make a claim, especially in a jurisdiction such as VCAT which does not provide orders as to costs;
3. the extent of any benefit received by the tenant for the payments;
4. the possibility of future amendments to the Building Act;
5. the possibility that the Opinion will not be adopted by a subsequent court or tribunal, especially on appeal; and
6. a consideration of the relevant provisions of the Building Act.

Please contact Andrew Bini if you would like assistance with your leasing matters.

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Due Diligence – A Tenant’s Perspective

When assisting tenants in the negotiation of a new lease for commercial or retail premises we strongly urge tenants to arrange a physical inspection of the premises by a qualified inspector before entering into the Lease. 

The inspection should cover the building structure including power and plumbing systems, air conditioning and other installations.  The resolution of problems identified in the inspection report can then be negotiated with the landlord and form part of the written terms of the Lease. 

In some instances we have seen tenants not follow our advice, only to find that after the Lease is signed the tenant is deemed to have accepted the premises in their current condition, including problems (i.e. they are deemed to have accepted the premises “as is”).  This can be a costly issue for tenants as in most instances Leases require tenants to bear the costs of maintenance and repair of the premises including such problems. We can assist tenants with the negotiation of Letters of Offer, Head of Agreement, Agreements for Lease and Lease documents.

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