Commercial landlords and tenants – pay attention to your lease

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Most landlords and tenants get along pretty well. Tenants want to get on with making a living without having to fight the landlord about repairs or rent reviews. Landlords want the rent to be paid on time, and… that is pretty much it. 

If potential problems emerge, in most cases the parties sort it out with a few phone calls and emails. They tend to “set and forget” the lease. 

Sometimes, when a lease expires, no-one bothers to get an extension or new lease signed up. The lease continues in a blissfully relaxed situation called “holding over”. This means that either party can terminate the lease on one month’s written notice, but strangely, that often doesn’t seem to worry people. The rent keeps getting paid, the tenant gets on with business, and everyone is happy.

Until they’re not. A recent Queensland Supreme Court decision has delivered a devastating defeat to a commercial tenant which is a classic example of why the seemingly “standard” lease is actually a crucial element of any business.

Ultra Tune Nerang is a franchised business which operates from ideal premises close to the Pacific Motorway and with good exposure to passing traffic.

The lease ran from 2006, for two five-year terms, until 2016. In 2016, the tenant didn’t exercise its option for a further 5-year term. The lease then continued with the tenant holding over under a monthly tenancy. 

This peaceful state of affairs lasted for three more years, until rumblings from Ultra Tune head office prompted the tenant to open negotiations with the landlord about signing up a new lease. Also, the tenant was looking to sell the business, and wanted more security over their business premises.

The landlord, Mr Dalton, produced a draft lease, for a five-year term with a five-year option. The landlord was careful to state that it would not be bound until the lease was actually signed. This is because it is possible, in certain legal circumstances, for the actions of a party to amount to a binding agreement even where a final document has not been signed.

Negotiations then went back and forth for a year, on many points in the draft lease, and Covid rent relief. 

By late 2020, the tenant definitely wanted to sell the business, and was pushing for the lease to be signed. The tenant signed the latest version of the lease and sent it to the landlord. 

The tenant then went ahead and signed a contract to sell the Ultra Tune Nerang business, conditional on a lease being in place.

The tenant heard nothing back from the landlord for a while. Finally, in November 2020, the landlord told the tenant that it was not proceeding with the new lease, as the tenant did not feature in his future plans for the property.

Usually, the sale would fall over in this situation. However, here the business sale settled, with the Ultra Tune franchisor promising the new owner support if new premises have to be found in the future. 

Ultra Tune took court action against the landlord, arguing that the lease had been finally agreed and should be binding even though it hadn’t been signed. Among other things, the tenant argued that a delay of 15 days where nothing happened meant that the landlord should be bound by the lease which it had received signed by the tenant.

The court disagreed, and as a result the lease continued as a monthly tenancy. Ultra Tune Nerang remains there to this day, but a sale of the business at that location would be very difficult, with Mr Dalton able to terminate the lease on one month’s notice.

This case shows that leases should not be left to float along unless it is an informed choice by both landlord and tenant. This means that option exercise dates are crucial and planning ahead is essential.

In a market where landlords are struggling to find tenants, and there is plenty of available space, tenants may hold the whip hand in negotiating during a holding over situation. But more often, landlords hold all the cards. 

FC Lawyers can help businesses with advice on the management of their lease obligations and timeframes. 

Also, when a lease is being negotiated, experience counts. Negotiation of amendments to a lease may seem far-fetched or nit-picky, at the start of the lease when everyone is happy. It is only later, when there is a problem, that the fine print proves to be a crucial factor in resolving a dispute in favour of landlord or tenant.

No two leases are the same. FC Lawyers know their way around all types of commercial lease, including retail, office, commercial and industrial. FC Lawyers has acted for hundreds of landlords and tenants and offers practical advice which doesn’t get in the way of the deal but enables a frank and informed conversation before the lease is signed up.

Contact our team at FC Lawyers today to discuss your commercial leasing concerns.

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