Temporary Update: On the 15 May 2020, the COVID-19 Emergency Response (Commercial Leases No 2) Regulations 2020commenced,pursuant to section 7 of theCOVID-19 Emergency Response Act 2020 (SA). The amending legislation can be found here [link opens in a new window].
The Regulations aim to mitigate the adverse impacts on a party to, or any other person with an interest in, a commercial lease resulting from the COVID-19 pandemic.
The Regulations can apply retrospectively from 30 March 2020, and will be in place until 30 September 2020. [see reg 5]
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Most businesses occupy premises leased from a landlord. The lease is usually for a set number of years ending on a specific date. The tenant obtains the security of a long term lease but also an obligation to pay rent for all of that period even if the tenant leaves the premises. A lease cannot be 'broken' before its term expires, free of liability, unless both landlord and tenant agree. Often the tenant is given a right to renew the original term of the lease for a further set period. This renewal is at the sole discretion of the tenant.
Leases of business premises in South Australia are regulated by the Retail and Commercial Leases Act 1995 (SA). Professional advice needs to be sought when entering into a lease, given that the Act is complex. The Act applies to any lease for rent that does not exceed $400,000 (an increase applicable to all leases notwithstanding the earlier threshold of $250,000). Premises covered by the Act include any business premises that sell goods by retail or provide services to the public, including offices. The minimum period for a lease under the Act is five years, except where there is a certified exclusionary clause (S20K) or the lease is for a fixed term of 6 months. The Act requires landlords to provide certain information to prospective tenants, and regulates expenses that can be recovered from tenants. For example, land tax cannot be recovered from tenants.
Usually under a lease, rent must be paid each month and a rent review clause allows the rent to be reviewed each year or each time the lease is renewed. If the lease is covered by the Act, rent reveiws are only permitted every 12 months, except in certain circumstances [s 22]. The lease will often state that interest is payable on any rent payment that is paid late.
The lease will place responsibility on the tenant for repairs to the premises caused during the term of the lease. An exception is usually made for structural repairs. At the end of the lease the tenant must usually leave the premises in the same condition they were in at the commencement of the lease, allowing for deterioration by ordinary wear and tear.
In addition to the rent, the tenant usually pays for council rates, water rates, building insurance, public risk insurance, plate glass insurance, stamp duty and half of the cost of preparing the lease documents. A lease may state that the landlord is to provide certain works in the premises before the tenant moves in. Those works and their completion date should be specified to avoid later disputes. A tenant must always obtain permission to alter the premises, even to nail holes in walls. It is best to obtain written consent from the landlord. A tenant who installs fixtures may be entitled to remove them at the end of the lease, but only if they are classified as trade fixtures (fixtures that the tenant must have to continue a particular business). If not, a tenant may well be adding fixtures to the premises that remain part of the landlord's premises. It is best to get written acknowledgment from the landlord that certain fixtures can be removed by the tenant before they are installed.
Sometimes a shopping centre lease requires a tenant to pay a contribution for promotions, building improvements, management costs and security costs. Also, the rent maybe a percentage of the tenant's takings, with rigorous requirements for book keeping placed on the tenant.
Most landlords will require the directors of a company leasing premises to guarantee the company's obligations as lessee. If a director agrees to this, the usual protection given by the creation of a company is lost on that lease. Alternatively, the landlord may ask that some other person guarantee the lease. There is no obligation on the company to give its financial details to a prospective guarantor, but if it does, this information must not be misleading. The guarantor is expected to ascertain whether the company is keeping up its lease payments.
The Act also sets out a strict regime for the assignment of a lease to a third party if a business is sold (Part 7). Care should be taken to comply with the requirements of the Act to ensure that the lease is effectively assigned and liability for rent does not remain with the original tenant.