A lease provides a leasehold interest in land to the tenant. While inferior to ownership it allows the tenant exclusive possession of land, being the subject of the lease.
A leasehold interest is a proprietary interest in land. This can be viewed in contrast to a licence to occupy land. Under a licence there is no legal or proprietary interest in the land itself. It is simply a contractual right to access.
Requirement for Writing
A proprietary interest in land must be in writing.
An exception to this requirement is a lease at fair market rent for a term not exceeding 3 years, including any option period.
Leases for Land under the Torrens Title System
The majority of land in Australia is registered under the Torrens Title system as set out in the applicable legislation of the relevant state.
Section 53(1) of the Real Property Act 1900 (NSW) requires any lease for land for a term exceeding 3 years (the option period is not relevant to this section) must be in the approved form under the Real Property Act.
Registration of Leases
In most states a lease for a term, and any option added together with this term, of less than 3 years is not required to be registered. All other leases that fall under the Torrens system are required to be registered.
Failure to Register
If a lease is not registered and is required to be under the Torrens system then in general, any competing interest that is registered will take priority. However the principal set out in Walsh v Lonsdale (1882) 21 ChD9 and developed further in subsequent cases provides that if a tenant is in possession under an invalid lease, including an unregistered lease required to be registered, the tenant will be treated as the actual tenant and the terms of the lease will form the basis for the rights of occupation. Therefore the landlord could enforce the terms of the lease notwithstanding it is unregistered.
In some circumstances this principal may not always apply. Applying earlier High Court authority, in a recent case, in determining whether a lease under 3 years was valid at law between the parties, the court held it was not and that the guarantors were not liable under the terms of the lease.
The Victorian Position
The registration process in Victoria differs from other states. Section 66 of the Transfer of Land Act, 1958 permits the registration of leases for more than 3 years, however, a tenant in possession under a lease regardless of whether it is registered obtains priority and protection over any subsequent interest. As a result the general leasing practice in Victoria does not include registration, irrespective of the duration of the lease.
Classification of Leases Based on Use and Type of Premises
The type of land (or premises) and the use by the tenant can also create different classifications for leases. These are generally:
(A) Commercial leases
(B) Retail leases
(C) Residential leases
In most states residential leases and retail leases are subject to specific legislation.
Generally retail lease legislation defines a retail lease as being any business within a shopping centre, or if not within a shopping centre, a type of business that is determined to be retail in nature.
General Terms of a Lease
The general matters to be addressed in a lease are:
Express provision is required in a lease to disclose the amount of rent or the manner in which it is calculated. However the rent will be payable by the tenant to the landlord regardless of whether the lease provides a covenant for the tenant to pay. The law imposes this obligation regardless. Further, statute implies the covenant to pay rent in all leases.
Notwithstanding this implied statutory obligation to pay rent an express provision is generally considered necessary to provide precise detail of this obligation, for example, the exact day for payment of rent and whether rent is payable in advance or arrears.
Express provision is required in a lease to determine any review of the rent during the term of the lease and the method of calculating this review. Common types of reviews are:
- Indexation to inflation, which is calculated by reference to changes in a particular Consumer Price Index which is published quarterly
- Fixed increases
- An increase to the market value of rent
A ratchet clause is a mechanism used in rent review clauses to ensure that after a review the rent will not be lower than the rent prior to that review. In New South Wales, Victoria, South Australia and Tasmania such ratchet clauses in retail leases are void.
Outgoings are the running and holding costs of the landlord for the property or premises. If outgoings are to be passed on to the tenant they are normally calculated by one of the following methods:
- Reimbursement to the landlord for increases in outgoings incurred over a specified base year
- Reimbursement to the landlord for all outgoings
- If the premises, being the subject of the lease, are part of a larger property or building, the outgoings will generally be apportioned as a percentage
Assignment, Sub-letting and Parting with Possession
As a lease is an interest in land, a tenant has an interest that is capable of being freely assigned or disposed of by providing inferior rights, such as a sub-lease or licence. However, a landlord will generally require restrictions on this right.
While the landlord could prohibit such assignment or parting with possession it would generally not be acceptable to a tenant. Further statute overrides any such prohibition.
Therefore generally leases are drafted to qualify an assignment or parting with possession by the tenant, for example disclosing that consent to such assignment will not unreasonably be withheld by the landlord. Alternatively the lease can set out the criteria for the incoming tenant or sub-tenant, such as, the incoming tenant must be solvent, responsible and capable of paying rent and performing the tenant’s obligations.
In retail leases the position is generally dealt with by the relevant retail leasing legislation in relevant states. In New South Wales and Victoria the respective Retail Leases Act 1994 and Retail Tenancies Act 1998 do not deal with this issue by reference to reasonableness but rather provide specific circumstances whereby the lessor may withhold consent. These circumstances are:
- The incoming tenant proposing to change the use of the retail premises
- The incoming tenant having financial resources or retailing skills inferior to the current tenant
- Non compliance with the specific procedure for obtaining consent
South Australian and Tasmania have provisions similar to those of the New South Wales legislation. In Western Australia the reasonable grounds test is used.
On assignment the relationship between the landlord and the original tenant does not end. Therefore the landlord may sue the original tenant for arrears in rent, or other breaches, by the incoming tenant. Practically this results in the original tenant being a guarantor of the incoming tenant.
An option may be provided in a lease to the tenant. The option allows the tenant to choose a further right in relation to the lease, usually the granting of a further term of the lease after the expiry of the initial term. The lease will set out the provisions of the further lease which are generally on the same terms and conditions, subject to determination of the appropriate rental.
An option can also provide a right to purchase the freehold from the landlord.
An option would generally be exercised by the tenant by notice in writing within a certain time frame disclosed in the lease.
Repairs and Obligations for Make Good
Subject to contrary provisions in a lease, a tenant does not owe a duty to the landlord to repair the premises as a result of general fair wear and tear over time. However, if a tenant fails to use the premises in an appropriate and tenant-like manner then there may be an obligation on the tenant to repair any damage caused as a result of this conduct.
A lease should provide the circumstances and requirements upon the tenant to repair and yield up the premises on expiry or earlier determination of the lease. Provisions can also provide that the tenant must carry out repairs during the term, for example re-carpet or redecorate the premises at certain intervals during the term.
Plant and equipment of the landlord, for example lifts, escalators, air-conditioners which service an entire building will not normally be the responsibility of the tenant in its obligation to repair.
The types of insurance that a lease should require are:
(A) The building and the premises, fixtures and fittings and tenant’s stock-intrade
(B) Public liability and negligent damage to the property
(C) Workers compensation
(D) Business interruption or loss of profit
Whose responsibility it should be to take out this insurance will depend on the general availability of insurance to the particular party and the relevance of such insurance. Generally, a premises that is part of a larger building owned by the landlord will be insured by the landlord as a whole (such costs may be passed on to the tenant through the outgoings provisions). The tenant should insure its own stock and fittings. A lease will normally require the tenant to take out public liability insurance and provide the landlord as an interested or benefiting party. The landlord will normally also take out its own public liability insurance.
viii. Quiet Enjoyment
A provision that is implied in every lease is quiet enjoyment. This is the proposition that if a tenant pays rent and complies with its obligations under the lease then it is entitled to use of the premises without interference from the landlord.
The relevant retail tenancies legislation in the various states provide for this quiet enjoyment. This obligation upon the landlord can be summarised as follows:
(A) Not to inhibit in any substantial manner the access of the tenant to the premises
(B) Not to alter or inhibit the flow of customers to the premises
(C) Not to cause and to prevent or move any disruption to trading