The permitted use in a retail or commercial lease describes how you, as the tenant, can use the leased premises. Because you can only use the premises for the permitted use, it is essential that you accurately describe how you will be using the premises throughout the entire term of the lease. This article will explain what permitted use is and its importance when entering into a retail or commercial lease.
Describing Your Permitted Use
To accurately describe your permitted use, think about:
- your current and future business activities; and
- products or services that you will sell from the premises.
You should think broadly, as being too narrow or restrictive could prevent you from expanding your business or being able to transfer the lease to another tenant in the future.
Once you have your proposed permitted use, it is beneficial for a leasing lawyer review the description. This will help you avoid issues concerning exclusivity, development approval and transfer of the lease. Additionally, it will help ensure that the relevant legislation covers you.
When you are negotiating your lease, you may wish to consider requesting that your permitted use is exclusive to you. This will mean that no other business in the shopping centre or building should be able to operate using the same permitted use, which could potentially:
- minimise your competition; and
- increase your sales.
For this reason, it is vital that the permitted use is clear, giving you a greater chance of being able to stop prevent a competing business from opening and operating.
The Wording of the Exclusivity Clause
You should also be wary of the wording of the exclusivity clause in the lease. The importance of this was demonstrated in the NB2 Pty Ltd v P.T. Ltd case.
In this case, the tenant operated the only fresh fruit and vegetable shop in a shopping centre. Once their lease expired, the landlord agreed that the tenant would be the “sole independent fresh fruit and vegetable operator” if they paid a higher rent.
After the tenant signed the new lease with the exclusivity rights, another supermarket opened in the centre. This supermarket was also selling fruits and vegetables. Unfortunately for the tenant, this meant that:
- business sales went down; and
- they fell behind in their rent.
When the landlord took the tenant to court, the judge decided that the use of the word “independent” meant the tenant would be the only “independent” operator in the centre. Ultimately, this meant that the supermarket, which was not an independent operator, could not be stopped from selling fruit and vegetables. In this case, the tenant’s exclusivity was lost.
Many leases will state that the landlord does not promise or guarantee that the premises are suitable for the permitted use in the lease. This means that it is your responsibility to research and make enquiries about how the premises can be used and if the premises are suitable for your business. Ideally, you should do this before you sign the lease.
To do this, contact the local council and order a planning certificate to find out the zoning for the premises. The planning certificate should also set out the uses of the premises that are:
- permitted without development consent;
- permitted only with development consent; and
Lease Conditional Upon Development Consent
Where your permitted use is permitted only with development consent, you will require a:
- complying development certificate; or
- development approval from the local council.
If this is the case, you should consider making the lease conditional upon the development consent being granted. This will mean that if the council does not grant the permission within the specified timeframe, you can terminate the lease early. If the lease is not conditional upon development consent, you will be bound to the lease and will have to start paying rent even though you cannot use the premises for use that you originally planned.
In most cases, applying and paying for the development consent will be your responsibility as the tenant, unless you have negotiated otherwise with the landlord. To apply for this consent, you should consider working with private certifier or lawyer to prepare your application. As part of your application, you will need to provide:
- detailed site plans;
- car parking spaces;
- loading facilities;
- trading hours;
- number of staff; and
- goods or services that you will provide.
Once your application is approved, you should consider making the permitted use in your lease consistent with your complying development certificate or development approval. This should minimise the chance of any issues with the local council once you are operating your business. However, if the application is not approved, you may need to:
- appeal the decision;
- change your permitted use; or
- submit another application.
Transfer of Lease
Depending on the requirements of your business, you may need to transfer the lease to another tenant during the term. Before you can transfer the lease, you will need written consent of the landlord, which is usually only granted if you satisfy all of the conditions set out in the lease.
One of the most common conditions is that the incoming tenant will not change the existing permitted use of the premises. This means that you can only transfer the lease to another tenant who is going to:
- run the same type of business that you did; or
- purchase and run your business.
For this reason, it is vital that your permitted use is not too narrow or restrictive. Otherwise, you may have trouble finding another tenant to take over your lease. To make transferring the lease easier, you may also wish to include a clause stating that the landlord will not withhold their consent if the incoming tenant will operate a business using a similar permitted use.
Retail Leasing Legislation
Being covered by the retail leasing legislation is beneficial for you as the tenant because it means, for example:
- the landlord must provide you with a disclosure statement, which sets out a summary of the important information and details for your lease;
- you do not have to pay for the landlord’s lease preparation expenses; and
- the rent can decrease as a result of a market rent review.
Describing how premises can be used when entering into a lease may seem like a simple concept. However, it is vital that your permitted use is carefully worded to ensure it reflects your actual use of the premises and to increase the likelihood that the:
- permitted use is exclusive to you, if agreed by the landlord;
- development consent is approved, if required; and
- lease being covered by the retail leasing legislation, if appropriate.
If you have any questions, contact LegalVision’s leasing lawyers on 1300 544 755 or fill out the form on this page.
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