THE LEASE OF YOUR WORRIES
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
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.