As the tenant of a commercial premises, it can be challenging to know what your rights are. A common area of confusion for tenants is whether you must pay your landlord’s legal fees for:
- preparing the lease; and
- any legal issues during the term of the lease.
The answer to these questions is not clear-cut. Rather, it will depend on a number of different factors. This article will explain the key issues to consider when determining whether you must pay your landlord’s legal fees.
Before You Enter the Lease
After you and the landlord have agreed on the commercial terms of the lease, the landlord’s lawyer will typically prepare the lease. These terms concern the:
- length of the lease;
- rent payment; and
- any other key details.
It is good practice to record the commercial terms in a letter of offer or heads of agreement. In these documents, you should state which legal fees both parties should expect to pay throughout the duration of the lease.
Once the landlord’s lawyer has prepared the lease, you will likely have your own legal expenses.
However, you may also need to pay the landlord’s legal fees. Whether you need to do so will depend on whether the:
- lease is a retail lease or commercial lease; and
- parties have agreed on who will pay these expenses.
Is Your Lease a Retail Lease or a Commercial Lease?
With the exception of South Australia (SA) and Northern Territory (NT), retail leasing laws throughout Australia generally prohibit the landlord from passing on their lease preparation fees to you, the tenant.
In NSW, however, the landlord can recover its legal costs if you seek amendments to the lease (other than amendments to correct mistakes). Therefore, if you negotiate your lease in NSW, you may need to pay the landlord’s costs of negotiating and making amendments.
In SA and the NT, the landlord can pass on the lease preparation fees to you in certain circumstances.
In most states, the law specifically states that you can be liable to pay the landlord’s costs if you withdraw from the lease.
If your lease is not covered by retail legislation, however, the landlord may recover its costs from you. Recovery of costs becomes a commercial decision for you and the landlord to decide.
Nonetheless, whether your lease is retail or commercial, it is becoming increasingly uncommon for tenants to pay landlord legal costs of preparing the lease. It is more market standard for each party to pay its own legal costs of lease preparation and negotiation. If your landlord is asking you to pay lease preparation fees for a retail lease, this could be a red flag. You should look into the matter further.
The best situation for you is to put an agreement in place where each party must pay their own legal costs. To avoid any uncertainty around fees, you should discuss this issue when negotiating the commercial terms of the lease. You should also document this agreement in a heads of agreement.
Whilst the ideal position is that each party pays for their own legal costs, the landlord may not always agree to this. In this case, the next best alternative is to agree that your contribution to the landlord’s lease preparation costs has a specific limit. This will ensure that you can budget for these expenses as part of your transaction costs.
Legal Fees or Disbursements?
When considering the legal fees associated with a lease, it is important to make the distinction between lawyer’s fees and disbursements.
Legal fees are the fees that you must pay a lawyer for their actions during the transaction. In comparison, disbursements are payments to third parties.
It is standard for a tenant to pay:
- lease registration costs; and
- mortgagee consent costs (subject to the retail legislation).
During the Lease
The majority of leases contain default clauses that oblige you to pay the landlord’s costs in certain circumstances. Generally, these circumstances arise if you breach the lease in some way.
If you have breached your lease (e.g. by not paying rent on time), it is important to be aware that your lease may permit the landlord to recover both the lost rent and the legal expenses of doing so.
At the End of the Lease
At the end of a lease, you will generally need to leave the premises in the same condition that you received them in. Some leases also require redecoration of the premises in the form of repainting. These requirements are known as your ‘make good obligations’.
If you fail to comply with a make good obligation at the end of a lease, the landlord could carry out the make good on your behalf. Subsequently, they can pass on the cost of the make good and any other legal costs relating to a breach of the agreement to you.
This guide will help you to understand your options when you purchase a business with leased premises.
Key Takeaways
Whether you need to pay for your landlord’s legal fees will depend on a number of factors. You are unlikely to need to pay these fees if you:
- are entering into a retail lease; or
- have negotiated the legal costs beforehand.
Ideally, you should agree that each party pays its own costs. This approach is becoming increasingly common. If the landlord insists that you pay their legal fees, you should negotiate a capped amount that you are willing to pay. Furthermore, the landlord can usually recover legal costs from you if you breach the lease. If you have any questions about whether you are required to pay your landlord’s legal fees, contact LegalVision’s leasing lawyers on 1300 544 755 or fill out the form on this page.
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