The Importance of a Permitted Use Clause in Retail and Commercial Leases

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Table of Contents

• Overview
• Exclusivity
• Development Approval
• Transferability of the Lease
• Permitted Use Laws
• Key Takeaways
• Frequently Asked Questions 

When entering into a commercial or retail lease, it is important to understand how you are and are not allowed to use the lease premises. These parameters are set out in the ‘permitted use’ clause, which can be found in every commercial or retail lease. It is a clause that describes how you, as the tenant, can use the premises. You can usually negotiate this before you enter into the lease. This article will explain the importance of the permitted use clause and the key issues to consider when describing permitted use in your lease.

Overview

It is important that the clause accurately describes how you intend to use the premises throughout the lease. It should describe what you will be doing on the premises now and in the future, and any products or services you will sell or provide on the premises.

When describing permitted use in your lease, there are a few main issues to consider. These include:

• the exclusivity of the permitted use;
• whether you have development approval for your intended use;
• the transferability of the permitted use; and
• the law which the lease falls under.

It is important to note that a permitted use clause is different from a trading covenant.

Exclusivity

It is a good idea to request that the permitted use in your lease is exclusive to you. This means that no other business in the shopping centre or building can operate under the same permitted use. This benefits you by minimising your competition and increasing your sales.

However, for the exclusivity to be effective, you must draft the permitted use clause clearly and accurately to have the best chance of stopping a competing business from operating in the same building as you.

Development Approval

Before signing on with a lease, it is typically the prospective tenant’s responsibility to research and enquire about whether the premises are suitable for their intended use. They also need to determine whether their intended use is permitted on the premises.

If the council has not yet approved your intended use of the premises, you will need to obtain the council’s development approval or certificate to proceed. You should make enquiries with the relevant council to determine how you should go about obtaining this approval. In most cases, to submit an application, you will need to provide documents detailing: 

• site plans; 
• car parking spaces; 
• loading facilities; 
• trading hours; 
• number of staff; and 
• goods and services that will be provided on the premises. 

It is therefore important, as the tenant, to make the lease conditional on the granting of development consent. Doing so will allow you the right to terminate the lease early if the council does not grant you permission for your requested use within a specified timeframe. 

Transferability of the Lease

It is also important to consider making the permitted use description broad. If the description of the permitted use is too narrow, it may restrict business expansion and the transferability of the lease. 

Further, if a lessee decides to sell their business, it is a common request from landlords that permitted use of the premises not be changed with the new tenant. Therefore, a broad permitted use description in the lease that includes uses that you are currently not using the premises for would make it easier to find a purchaser of the business. 

A similar concept applies if the lessee is looking to assign the lease to someone else or sublet the premises. It may also be beneficial to include in the lease that the landlord cannot withhold their consent if an incoming tenant will be operating a business that is similar to the permitted use described in the lease.

Permitted Use Laws

It is important to be aware of whether your lease is a retail or commercial lease because this will determine which laws govern the lease and its permitted use. Retail leases are governed by state-specific legislation. On the other hand, commercial leases are regulated by state-specific property and conveyancing Acts. Additionally, unlike a retail lease, a landlord and tenant can contract out of the property and conveyancing Act of their state, without interference from the law. 

Below is a table of the retail leasing legislation that applies to each state or territory in Australia:

Key Takeaways

The permitted use clause of a lease sets out how the tenant is allowed to use the premises. It is important to ensure that the permitted use you intend for the premises has the council’s consent. Additionally, this clause should be made as broad as possible, as to not restrict a future transfer of the lease. For more information regarding permitted use clauses or for assistance drafting or reviewing a lease, contact LegalVision’s leasing lawyers on 1300 544 755 or fill out the form on this page. 

Frequently Asked Questions