THE LEASE OF YOUR WOR­RIES

Inside Franchise Business - - Contents - BIANCA SEVASTOS Part­ner, Bay­bridge Lawyers

11 so­lu­tions to your burn­ing ques­tions.

Con­cerned about sign­ing up to a lease? Re­solve those burn­ing is­sues with these 11 ques­tions about what hap­pens next...

En­ter­ing into a long-term agree­ment such as a lease can be daunt­ing. Fran­chisees, whether they hold the lease in their own ca­pac­ity as ten­ant or are granted a right to oc­cupy the premises via a li­cence from the fran­chisor (or its leas­ing en­tity), should un­der­stand the pit­falls and dan­gers in leas­ing so they are bet­ter pre­pared for all sit­u­a­tions.

If you oc­cupy premises through a li­cence, you es­sen­tially as­sume all of the obli­ga­tions of the ten­ant un­der the lease.

Here are 11 com­mon ques­tions re­gard­ing po­ten­tial haz­ards that can be as­so­ci­ated with re­tail leases...

1. WHAT IF MY LAND­LORD WANTS TO RE­FUR­BISH OR REN­O­VATE THE SHOP­PING CEN­TRE?

For most re­tail busi­ness own­ers, fit­ting out the store will be one of the largest up­front costs of es­tab­lish­ing the en­ter­prise, if not the largest. But in most cases there is lit­tle guar­an­tee a ten­ant will be able to stay in their premises for the full term of the lease.

Most re­tail leases con­tain a clause that al­lows for the re­fur­bish­ment or ren­o­va­tion of the shop­ping cen­tre where the premises are lo­cated, which may mean your ten­ancy will be re­lo­cated or even ter­mi­nated. How­ever, re­tail leas­ing leg­is­la­tion in each state pro­vides some com­fort to ten­ants: a land­lord can­not de­mand a busi­ness re­lo­cate with­out pro­vid­ing some se­cu­rity or re­lief in re­turn.

While ten­ants should check the rel­e­vant laws in their state, the leg­is­la­tion has some gen­eral pro­vi­sions…

1. A land­lord must pro­vide the ten­ant with de­tails of a pro­posed re­fur­bish­ment/ren­o­va­tion rea­son­ably early, and the work can­not be car­ried out with­out va­cant pos­ses­sion of the premises.

2. A ten­ant can­not be re­quired to re­lo­cate un­less the land­lord has given writ­ten no­tice (in most states this is three months in ad­vance) which con­tains de­tails of the al­ter­na­tive premises be­ing of­fered. 3. A ten­ant is nor­mally en­ti­tled to a new lease for the al­ter­na­tive premises on the same terms as the ex­ist­ing lease and up un­til the same ex­piry date. The rent of the al­ter­na­tive premises must be the same ex­cept for any rea­son­able change be­cause of the dif­fer­ent com­mer­cial value of the premises.

4. If given a re­lo­ca­tion no­tice, you may be en­ti­tled to ter­mi­nate the lease within one month of that no­tice. 5. The land­lord may be re­quired to pay rea­son­able costs of re­lo­cat­ing, in­clud­ing the dis­man­tling of the current fitout and re­in­stal­ment in the new premises to the same stan­dard, plus le­gal costs.

If the land­lord in­tends to re­fur­bish or ren­o­vate the cen­tre, this should be dis­closed to you in the Land­lord’s Dis­clo­sure State­ment pro­vided to you be­fore you sign the lease. It is im­por­tant to con­sider the im­pact of any such works on your busi­ness and your in­vest­ment.

2. WHAT IF MY LAND­LORD WANTS TO DE­MOL­ISH THE CEN­TRE AND TER­MI­NATE MY TEN­ANCY?

As in ren­o­va­tion or re­fur­bish­ment pro­vi­sions, a lease may also con­tain a pro­vi­sion that per­mits the land­lord to de­mol­ish the shop­ping cen­tre and con­se­quently end your ten­ancy.

Again, re­tail-leas­ing leg­is­la­tion pro­vides some pro­tec­tion for ten­ants in such cir­cum­stances. Gen­er­ally, the land­lord needs to take two steps in or­der to be able to rely on the de­mo­li­tion clauses within the lease:

1. The land­lord must give the ten­ant de­tails of the pro­posed de­mo­li­tion; and

2. The land­lord must give the ten­ant at least six months’ no­tice of the de­mo­li­tion.

If you are served with a de­mo­li­tion no­tice, you can give the land­lord seven days’ no­tice that you wish to ter­mi­nate the lease. You do not have to wait un­til the six months’ no­tice pe­riod has ex­pired. The land­lord must com­pen­sate you for the value of the fitout, but com­pen­sa­tion does not ex­tend to the value of the busi­ness as a whole.

Just as with the ren­o­va­tion and re­lo­ca­tion pro­vi­sions, the Land­lord’s Dis­clo­sure State­ment should also state the land­lord’s in­ten­tion to de­mol­ish the cen­tre.

3. WHAT HAP­PENS IF I DE­FAULT ON MY LEASE?

A ten­ant should al­ways ob­serve and ad­here to all obli­ga­tions un­der a lease.

In the case of a breach, the ten­ant should be aware of the con­se­quences and the nor­mal pro­ce­dure. Breaches of leases may in­clude fall­ing be­hind in your rental pay­ments or fail­ing to re­pair any da­m­age to the premises as re­quired un­der the lease.

Typ­i­cally, a land­lord is re­quired to give a ten­ant no­tice that they have breached a term of the lease, and pro­vide a rea­son­able time frame for the breach to be reme­died.

If a ten­ant is served with a breach no­tice from a land­lord, they should take the mat­ter se­ri­ously and con­tact their so­lic­i­tor for ad­vice as soon as pos­si­ble.

Land­lords will gen­er­ally

have greater pow­ers than ten­ants be­cause of their stronger bar­gain­ing power and busi­ness

ex­pe­ri­ence.

If the breach is not reme­died, a land­lord may opt to ter­mi­nate the lease. This may, in turn, re­sult in the ter­mi­na­tion of the fran­chise agree­ment.

4. WHAT IS THE EF­FECT OF PRO­VID­ING A PER­SONAL GUAR­AN­TEE TO A LEASE?

If a fran­chisee takes a lease as ten­ant un­der a com­pany name, most land­lords will re­quire them to per­son­ally guar­an­tee the obli­ga­tions of that com­pany un­der the lease.

It is i mpor­tant to un­der­stand the im­pli­ca­tions of the per­sonal guar­an­tee, and what it means in the event of a de­fault or ter­mi­na­tion of the l ease. If the com­pany is un­able to meet its obli­ga­tions or debts un­der the l ease, the land­lord can pur­sue you as a per­son to ful­fil the obli­ga­tions of the com­pany.

It i s rec­om­mended that any ten­ant who has to pro­vide a per­sonal guar­an­tee for a lease should seek clarification from their so­lic­i­tor to com­pletely un­der­stand these obli­ga­tions. A per­sonal guar­an­tee can have se­ri­ous ram­i­fi­ca­tions i n the event of a de­fault or ter­mi­na­tion of a lease, as your per­sonal as­sets may not be pro­tected.

5. WHAT IS A BANK GUAR­AN­TEE, AND WHAT HAP­PENS WHEN I PRO­VIDE ONE TO A LAND­LORD?

It is cus­tom­ary for a bank guar­an­tee to be pro­vided to a land­lord as se­cu­rity un­der a lease. The amount may vary de­pend­ing on the pol­icy of the land­lord, but it is typ­i­cally equal to three to six months’ rent and out­go­ings for the premises. The land­lord holds the bank guar­an­tee as a form of se­cu­rity over the per­for­mance of a ten­ant’s obli­ga­tions un­der the lease.

When a ten­ant has de­faulted un­der a lease, the land­lord may elect to draw on the bank guar­an­tee. This can be when a ten­ant has failed to pay rent or has other un­paid debts un­der the lease.

If a land­lord uses part or the whole of a bank guar­an­tee, the ten­ant has to pro­vide a re­place­ment bank guar­an­tee so the land­lord al­ways has the se­cu­rity amount stip­u­lated in the lease.

6. CAN MY LAND­LORD TER­MI­NATE MY LEASE?

If a ten­ant has not com­plied with the terms of a breach no­tice, a land­lord may choose to ter­mi­nate their lease.

A land­lord will ter­mi­nate a lease ei­ther by no­tice to the ten­ant or by re-en­ter­ing and tak­ing back con­trol of the premises. In these cir­cum­stances, a ten­ant will typ­i­cally for­feit any bank guar­an­tee sup­plied to the land­lord and may also lose any equip­ment in the premises when the land­lord re-en­ters.

7. IF MY LEASE IS TER­MI­NATED, AM I LI­ABLE TO PAY DAM­AGES?

If a lease is ter­mi­nated by a land­lord for the breach of an es­sen­tial term, the land­lord may pur­sue the ten­ant, and/or the guar­an­tor, for loss and dam­ages. These dam­ages are typ­i­cally the money the land­lord could have ex­pected to re­ceive from the ten­ant had they stayed for the du­ra­tion of the lease.

While in these cir­cum­stances a land­lord is obliged to mit­i­gate their losses by ac­tively try­ing to find a re­place­ment ten­ant for the premises, it does not stop them from seek­ing dam­ages

8. WHAT HAP­PENS IF THE LEASE EX­PIRES BE­FORE MY FRAN­CHISE AGREE­MENT?

Of­ten the term of a fran­chise agree­ment is

sub­ject to the term of the lease for the premises. This means both ar­range­ments ex­pire at the same time. While it is not al­ways pos­si­ble, fran­chisees should try to ob­tain a lease that matches the term of their fran­chise agree­ment.

A fran­chise agree­ment typ­i­cally will pro­vide for cir­cum­stances in which a lease ex­pires or ter­mi­nates be­fore the fran­chise agree­ment. Fran­chisors may al­low a fran­chisee a pe­riod of time to ne­go­ti­ate a re­newal of their lease, or time to find al­ter­na­tive premises.

If a fran­chisee is un­able to find al­ter­na­tive premises within the al­lot­ted time there may be a clause in the fran­chise agree­ment that al­lows for it to be ter­mi­nated.

9. CAN I GET OUT OF MY LEASE EARLY?

Un­less the land­lord con­sents to let the ten­ant out of a lease early, an exit be­fore the due date is pos­si­ble only by as­sign­ment, which means trans­fer­ring the lease to a third party.

Most re­tail leases will pro­vide for as­sign­ment, but im­pose con­di­tions in or­der to pro­tect the land­lord and their in­ter­est in the lease. Typ­i­cally a land­lord will re­quire that the pro­posed new ten­ant prove they can meet the lease obli­ga­tions, and have at least the same busi­ness skills and fi­nan­cial ca­pac­ity as the current ten­ant.

When sign­ing a lease, a ten­ant should al­ways plan to oc­cupy the premises for the full lease term or con­sider in ad­vance the land­lord’s re­quire­ments for as­sign­ment of the lease.

10. WHAT ARE MY OBLI­GA­TIONS AT THE END OF A LEASE?

When a lease ex­pires or is ter­mi­nated, a ten­ant must va­cate the premises and re­move their prop­erty.

A land­lord may also re­quire a ten­ant to “make good”, which en­tails re­turn­ing the premises to the base build­ing con­di­tion, or the con­di­tion it was in when pos­ses­sion was taken. This will in­clude re­pair­ing any da­m­age caused by the re­moval of a ten­ant’s prop­erty.

Ten­ants should also be aware that if they do not re­move their prop­erty, the land­lord may do so and charge the ten­ant for the cost.

The price of de-fit­ting a store and mak­ing good a premises can of­ten be sig­nif­i­cant, and should be fac­tored into your busi­ness model.

11. WHAT ARE MY RIGHTS UN­DER RE­TAIL LEAS­ING LEG­IS­LA­TION?

Land­lords will gen­er­ally have greater pow­ers than ten­ants be­cause of their stronger bar­gain­ing power and busi­ness ex­pe­ri­ence.

It is im­por­tant for ten­ants to be aware of their rights un­der the rel­e­vant leg­is­la­tion, which may pro­vide some re­lief and help for the ten­ant in cer­tain cir­cum­stances. Talk to your so­lic­i­tor to bet­ter un­der­stand these laws and how they may pro­tect and ben­e­fit you.

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