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:

  1. preparing the lease; and
  2. any legal issues during the term of the lease.

The answer to these questions is not clear-cut and depends on a number of different factors. This article will explain the key issues to look out for when considering whether you are required to pay your landlord’s legal fees during the lifecycle of a lease.

Before You Enter the Lease

The landlord’s lawyer will traditionally prepare the lease after you and the landlord have agreed on the commercial terms of the lease. These terms concern the:

  • length of the lease;
  • rent payment; and
  • any other key details.

It is good practice to document the commercial terms in a letter of offer or heads of agreement. Within these documents, include which legal fees both parties are expected to pay throughout the entire duration of the lease.

Once the lease has been prepared, you will likely have your own legal expenses from any negotiations that you paid a lawyer to undertake on your behalf. However, do you also have to pay the landlord’s legal fees?

This answer will depend on whether:

  • the lease is a retail lease or commercial lease; and
  • if the parties have agreed on who will pay these expenses.

Retail or Commercial Lease?

With the exception of South Australia (SA), the laws on retail leasing throughout Australia prohibits the landlord from passing on their lease preparation fees to you, the tenant. However, in SA, the landlord can pass on half of the lease preparation fees to you, the tenant.

If your lease is a retail lease and your landlord is asking you to pay lease preparation fees, this should be a red flag and you should look into the matter further.

However, it is not unusual in commercial leasing for the landlord to require you to pay their legal fees for lease preparation.  

Ideally, 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. Furthermore, you should document this agreement in a heads of agreement.

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 third-party expenses that the lawyer collects but passes on to third-parties.

For example, a disbursement may be lease registration fees. These are fees that the landlord’s lawyer collects but does not use. Instead, they pass the fees on to the relevant state-based lands office. Here, they will register the lease on the title to the property.

Negotiation

If the legal fees are not agreed to when drafting the heads of agreement, it is still possible to negotiate who pays the lease preparation fees up until the lease is signed.  

Whilst the ideal position is that each party pays for their own legal costs, the landlord may not always agree to this. Therefore, the next best alternative is to come to an agreement where your contribution to the landlord’s lease preparation costs will have a specific limit. This will ensure that you can budget for these expenses as part of your transaction costs.

During the Lease

The majority of leases contain default clauses that oblige you to pay the landlord’s costs in certain circumstances. These circumstances are generally where you have breached the lease in some way.

If you have breached a lease, such as 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.

For example, if the landlord instructs their lawyer to prepare a letter of demand in these circumstances, you may be required to pay their lawyer’s costs.

At the End of the Lease

At the end of a lease, you will generally be required to leave the premises in the same condition that you received it in. Some leases also require redecoration of the premises in the form of repainting. The general terms for these types of things are ‘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 surrounding this breach of the agreement to you.

Key Takeaways

Whether you are required to pay for your landlord’s legal fees is dependant on a number of factors. You are likely to be required to pay these fees unless you are entering into a retail lease or if you have negotiated the legal costs beforehand.

If the landlord insists that you pay their legal fees, you should negotiate a capped amount that you will pay. Furthermore, if you breach the lease, the landlord can usually recover these legal costs from you. 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.

About LegalVision: LegalVision is a tech-driven, full-service commercial law firm that uses technology to deliver a faster, better quality and more cost-effective client experience.
Emma Heuston

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