Tenants’ Rights And Commercial Property Leasing Disputes

The COVID-19 pandemic considerably impacted existing lease relationships between tenants and their landlords in Australia. COVID-19 Regulations introduced by the NSW Government provided some protections to commercial lease tenants, but as these are wound back, it is possible that there may be more commercial property lease disputes in the coming months.

As things move on it is certainly no less important that both landlords and their tenants understand what they are committing to when signing a lease and where the potential areas for disputes are most likely to arise. Once a tenant signs a lease, it is difficult to negotiate any amendments and is binding for the duration of the lease. This article looks at potential issues that can lead to commercial property disputes and the importance of obtaining legal advice.

Commercial property leases and the law

Tenants of residential property have a number of legal protections, but this tends not to be the case with commercial tenants who are considered to have more commercial awareness. That said, commercial leasing agreements are often more variable and complex than residential agreements, with considerable room for negotiation of the terms.

Commercial leases (other than retail shops) are generally not so much regulated by statute as by common law and it is largely up to the landlord and tenant to agree on the terms of a commercial property lease between them. As such, leases will differ from agreement to agreement. They can be complex and often drafted in favour of the landlord so it is important that a tenant understands their rights (and responsibilities). This note will primarily consider this situation from the viewpoint of the tenant of a non-retail lease.

It should be noted that although retail leases are a form of commercial lease they are normally governed by statute law, largely though not exclusively, by the Retail Leases Act 1994. 

Potential issues that can arise in commercial property leases and lead to disputes

There are a number of key clauses that are important for a tenant entering a commercial property lease, which can lead to disputes between the tenant and their landlord. These include but are not limited to:

Rental increases

What is the rent payable, and when will rent reviews be undertaken? To avoid disputes, the timing of the rent reviews and the basis on which the rent will be reviewed should be specified in the lease.

Renewal clause

What is the term of the lease, and is there an option to renew?  If there is no option to renew the lease, the landlord is not under any obligation to grant another to allow continued operating on the premises.

Ratchet clause

There may be a clause which prevents the rent payable from reducing following a market rent review.

Mortgaged property

If the leased property is mortgaged, it is important to check that the lender has consented for the property to be leased out. If there is no consent, they may be able to terminate the lease if the landlord fails to make their mortgage payments.

Outgoings

What expenses will be paid by the landlord and what will the tenant be responsible for over and above the rent?

Bond

Some commercial property leases require a bond to be paid by the tenant to protect the landlord should their tenant default on payments or damage the property. The details of how the bond is to be returned to the tenant and under what circumstances it can be withheld should be agreed upon and documented in the lease.

Exit

Most agreements will include a clause that allows sub-leasing or assignment of the lease. This clause should stipulate that the landlord’s consent should not be unreasonably withheld.

If a tenant assigns their interest under the lease, not all rights and obligations will necessarily apply to the assignee.

Making good

A tenant is usually expected to return a property in the same condition as it was at the commencement of the lease. There must be an agreed documented process in place to prevent disagreements over what is necessary to ‘make good’.

Repairs and maintenance

This is the source of many landlord and tenant disputes. Normally the tenant will be responsible for making small repairs and keeping the premises in good repair but is not responsible for structural repairs and capital items. To avoid conflict, the lease should stipulate the responsibilities of each party.

Refurbishment

This clause may allow refurbishment of the premises while the lease is still running which could disrupt the tenant’s operations.

Resolving commercial lease disputes

Commercial lease disputes can be costly and time-consuming for both landlords and tenants. It is important that tenants understand their rights and how the law affects them. Unfortunately, however, disagreements between tenant and landlord are sometimes unavoidable. These disputes can arise at any point in the lease term or even after it has expired.

If a dispute arises between landlord and tenant, the parties should try to resolve the dispute informally through discussion and any dispute resolution terms that may be in the lease.

Disputes that cannot be resolved in this way may require an application to the Courts for a determination to be made.

Either the tenant or landlord can commence Court proceedings.

Commercial property legal advice from Szabo & Associates

Szabo & Associates Solicitors are specialists in commercial, industrial and retail leases and can assist in a number of capacities with all aspects of commercial property leasing, including:

• negotiating terms
• drafting documentation
• sub-letting and assignments
• providing advice in respect of disputes
• acting for tenants (and landlords) in Tribunals and the Courts.

In the event of a dispute, advice should be obtained at an early stage. If the dispute cannot be settled amicably, proceedings should not, for example, be commenced without advice as to the appropriate Court.

Contact our Commercial Property Lawyers in Sydney, NSW

Szabo & Associates Solicitors are specialists in all commercial property matters. When it comes to property disputes, we adopt a commercial and pragmatic approach. Whether you are a landlord, tenant or agent, we can provide the expertise to guide you to a successful outcome. Please contact us on 02 9281 5088 or fill in our online contact form.