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Focus: Relevant clauses to be considered in
lease negotiations Services:
Property & Projects Industry Focus:
Property
With any commercial transaction the negotiation stage is
critical. Relevant issues need to be identified and agreed in
principle between the parties prior to formal documentation being
entered into.
In lease transactions, the parties (or their agents) often sign
up heads of agreement outlining the intended commercial terms and
any unusual legal provisions. Lengthy delays in ultimately agreeing
on formal lease documents can often be avoided if attention is
given in advance to the relevant issues when heads of agreement are
compiled.
A host of issues may need to be covered off. In this Alert we
focus on:
Relocation clauses
Demolition clauses
Expansion clauses
Contraction clauses
Relocation clauses
A relocation clause allows the landlord to move the tenant to
alternative premises within the building, centre or estate.
Such a clause would usually be included in a lease if the
landlord anticipates requiring the premises for another purpose
prior to the end of the term (e.g. for redevelopment of the
building or reconfiguration of the tenancy mix). Issues to be
considered by the tenant include:
What premises will the tenant be relocated to?
Are the new premises in a better or worse position than the old
(i.e. is there a commercial benefit attaching to one of the
premises)?
What rent per square metre will be payable for the new premises
(having regard to the commercial benefit of the new premises
compared to the old)?
The extent and cost of the make good to be undertaken in the
old premises.
The extent and cost of fitting out the new premises.
The disruption to the tenant's business whilst moving and
fitting out the new premises.
What compensation will be payable by the landlord?
Demolition clauses
A demolition clause allows the landlord to terminate the lease
if the landlord intends to demolish the premises, usually as part
of a larger demolition project.
Such a clause is usually included in leases where the landlord
thinks an opportunity may arise during the term of the lease to
develop the property and may require the demolition of the premises
as a part of the proposal. Issues to be considered by the tenant
include:
What effect will termination of the lease have on the
tenant's business?
What period of notice will the tenant receive or require in
relation to the proposed demolition?
If no relocation provision is included, the need to find new
premises, negotiate a new lease and fit out the new premises.
The disruption to the tenant's business whilst moving.
What compensation will be payable by the landlord?
Expansion rights
Expansion rights in a lease usually allow the tenant a certain
period within which to notify the landlord if it requires
additional space within the building. Such a clause is usually
included in leases where the tenant's business plan predicts
growth and the need for increased accommodation during the term of
the lease. Such clauses will usually specify:
The areas of the building, centre or estate over which the
tenant is to have expansion space rights;
The rent payable for the expansion space (usually linked to the
rate payable for the currently leased space); and
The conditions upon which the expansion rights may be
exercised.
The landlord will need to keep a careful record of all expansion
rights granted by it and when they arise.
Contraction rights
As opposed to expansion rights, a contraction right in a lease
usually allows the tenant a certain period within which it can
notify the landlord that it wishes to surrender part of its
tenancy.
Once again this clause benefits the tenant. It allows the tenant
to reduce its rent obligations when there is a downturn in its
business and its accommodation requirements are reduced. Issues to
be considered by the landlord include:
The timing for the tenant to exercise the right, the length of
notice required and the potential for the landlord to lease the
space handed back; and
The likely leasing market conditions that might apply when the
space is handed back.
Retail Leases Act
Where a State's retail leases legislation applies, it will
generally override any commercial agreement between the parties
which conflicts with its provisions. Landlords and tenants will
need to ensure that the commercial terms negotiated by them comply
with the requirements of the Act where applicable.
These are some of the matters which need to be considered when
heads of agreement are drawn up. Detailed consideration at an early
stage of these topics and any consequential issues will help ensure
that the parties are still smiling at the end of the
transaction.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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