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Leases can be difficult to understand due to their size and complexity. This is compounded by the fact that your lease and leasing law will sometimes use traditional legal terminology instead of contemporary vocabulary. The sections in a lease can cover a variety of rights and obligations of the landlord and tenant, which differ significantly. The landlord will usually prepare the lease (at the tenant’s cost). Therefore, this can result in a power imbalance when negotiating the key terms of the lease and the adoption of commercial terms heavily favouring one party over the other. 

However, it is essential that both landlords and tenants understand the typical terms of a lease and how the relevant state and territory law can override any agreed terms before taking legal action. Otherwise, they risk not having legal grounds to do so. This can result in having to compensate the other party for their losses, which can be compounded once a lease dispute escalates. This article will: 

  • look at the key rights and obligations of the parties to the lease; and
  • discuss the importance of getting advice to understand the leasing law. 

Key Rights and Obligations Under the Lease

Obligations of Commercial and Retail Tenants

It is incorrect to say that a tenant’s sole responsibility is to pay the landlord on time. A tenant must comply with all their obligations, as well as obligations under the law, in the lease, which cover a variety of potential circumstances. If the tenant breaches one of their obligations, they must try to remedy the default promptly. Otherwise, they risk having the lease terminated or being forced to compensate the landlord.

Note: a commercial lease is usually for an office, industrial site or warehouse where there is not likely to be retail activity (such as selling products to customers). A retail lease is a type of commercial lease typically for retail premises, such as: 

  • shop-fronts; 
  • food outlets; and
  • stores inside a shopping centre. 

There are state laws that determine what may or may not qualify as a retail premises. Some factors may include the: 

  • size of the premises; 
  • length of the lease; and
  • purpose of the business operating from the premises.

Obligations in Standard Leases

The obligations typically found in standard leases are that the tenant must:

  • use the premises only for a ‘permitted use’ as stated in the lease or agreed with the landlord, including obtaining any relevant council authorities or permits;
  • pay the rent on time and at the agreed amounts (including paying any increases or adjustments during the term);
  • reimburse the landlord for the cost of utilities (water, electricity, gas, internet) attributable to their leased space;
  • provide a deposit to the landlord or cover the landlord’s legal costs of preparing, negotiating and executing the lease;
  • provide a suitable security bond, bank guarantee or personal guarantee to the landlord (typically equivalent to several months’ worth of rent);
  • clean the premises, so it remains in good working condition at all times;
  • conduct internal maintenance in the premises (for example, internal painting);
  • close and lock the premises, so it remains safe and secure when not in use;
  • repair any damage done to the premises by the tenant or its visitors;
  • obtain appropriate building and contents insurance, public liability insurance or other insurances depending on the nature of the business;
  • conduct any fit-out or improvements to the premises agreed with the landlord;
  • comply with the landlord’s reasonable requests, including to attend and inspect the premises (with notice);
  • allow the landlord to conduct urgent or emergency structural repairs to the premises;  and
  • restore the premises to a proper condition at the end of the term of the lease.

Breach of the Lease

A failure to comply with any other included obligations is a breach of the lease under the law. A breach will typically result in a requirement for the tenant to do an action or compensate the landlord for remedying the default. If a term is breached that is significant or essential to the core agreement of the lease, then it could be considered a serious or ‘material’ breach. Further, this may allow the landlord to terminate the lease

Tip: If a clause of a lease attaches a financial penalty to a breach by the tenant, beyond compensating the landlord for their genuine losses, a court could deem it an unfair contract term. This would make it void and unenforceable in legal proceedings.

Rights and Protections of Tenants

Despite being lower in number than the obligations, tenants in commercial and retail leases do receive some degree of limited rights and protections in leases. Generally, these rights include:

  • exclusive use of the premises;
  • no interference or disruption to their business operations by the landlord. This is unless they have a valid reason contemplated by the lease, known as ‘quiet enjoyment’; 
  • the ability to use the premise without disturbance or interference from other tenants of the landlord. This is also included in the right to ‘quiet enjoyment’;
  • certainty surrounding their ongoing right to occupy and use the premises for the term, including potential rights to renew or extend the term of the lease in accordance with the landlord’s conditions;
  • the consistent supply of water, electricity, gas, internet and waste removal services in the premises. This is unless the tenant is responsible for organising any of these; 
  • receiving a reasonable period of time to remedy any defaults or breaches of the lease. This is dependent on the severity of the breach; and
  • receiving reasonable notice from the landlord before they take any action to remove them from or prevent them from accessing the premises.

Breach of Tenant’s Rights

If the landlord’s actions infringe any of the tenant’s rights, then the tenant could notify the landlord of the breach and ask them to remedy it. Suppose the landlord does not remedy a sufficiently serious breach within a reasonable time frame. In that case, the tenant may have the legal right to terminate the lease.

Tip: Tenants in a retail lease have additional rights to receive certain disclosures about the estimated costs of the premises and other pertinent information. If a landlord does not give adequate information prior to the commencement of the lease, then a retail tenant may be able to terminate the lease within a time period after it begins. In New South Wales, this amount is six months, but the additional rights and protections differ between states and territories. 

Obligations and Rights of the Landlord

As the owner of the premises, the landlord usually has less onerous and fewer obligations compared to the tenant. Landlords usually have better negotiating power. Therefore, they can ask more from tenants to minimise their level of effort or involvement.

The obligations typically found in standard leases are that the landlord must:

  • allow the tenant proper and exclusive access to use the premises;
  • not unreasonably interfere with the tenant’s enjoyment of the premises;
  • ensure the premises are fit for use by the tenant, including fitting out the premises prior to the commencement date; and
  • maintain the structural integrity of the premises by conducting structural repairs to external walls and areas which may be inaccessible by a tenant (such as the basement or roof); and 
  • service infrastructure that is outside the area leased by the tenant (such as internal air conditioning duct systems).

Note: these obligations will differ between leases, particularly as the laws can change between states and territories. The lease should provide as much clarity as possible, particularly where a premises requires additional maintenance or repairs.

The landlord’s rights will mostly mirror the obligations of a tenant. For example, suppose the tenant has an obligation to pay rent and pay for their use of utilities. Then, the landlord has a right to receive these amounts as compensation for allowing the tenants to use the premises for the term of the lease. Similarly, suppose the tenant is prohibited from damaging the premises. In that case, the landlord usually has the right to ask the tenant to fix the damage or compensate the landlord for their expense of doing so. 

Exceptions to Exclusive Use

A lease will often set out the exceptions to the tenant’s exclusive use of the premises. It will also set out circumstances in which the landlord can visit the premises. Common justifications for a landlord to visit the premises are:

  • conducting standard inspections of the premises (after giving adequate notice);
  • attending scheduled or recurring meetings with the tenant;
  • doing urgent repairs or maintenance to the premises (especially if there is immediate danger or there are safety hazards);
  • inspecting the premises when the landlord has a reasonable belief that the tenant may be in breach of the lease (or is likely to be in breach of the lease);
  • showing the premises to prospective tenants or purchasers (provided the current tenant has been suitably notified in advance); and
  • entering the premises and taking control of the lease (known as ‘re-entry’).

Breach Notice

A landlord can exercise their rights by issuing a formal letter. This letter is referred to as a breach notice, notice of default or notice to remedy breach of lease, depending on the location. Of course, the most powerful right of the landlord is to terminate the lease due to sufficiently serious or unremedied breaches of the lease by the tenant. 

Note: A landlord’s right to terminate the lease, re-enter the premises, kick out the tenant and change the locks can be highly contentious issues. If a tenant has committed a ‘serious’ breach of the lease, the landlord may be able to terminate the lease immediately. Alternatively, the landlord may be obliged to provide a reasonable time to remedy the breach. Arguments often arise between landlords and tenants regarding what is a ‘serious breach’ and ‘a reasonable time to remedy’ it.

How The Law Applies to Your Lease

The starting point of a dispute is to review the lease itself. However, a relevant question to ask is whether the sections of the lease relevant to the dispute are legally valid. Most contracts, including leases, will state that their sections are applicable to the extent they are permitted by, or not contrary to, the law. 

Although a lease is a binding legal document, it is not above the law. Additionally, the landlord and tenant cannot agree to ignore the law, which will usually override the provisions of a lease. These could include:

  • a provision that unreasonably undermines a tenant’s rights to exclusively use the premises;
  • the parties’ obligations to negotiate rent and other payments in accordance with the National Code of Conduct for commercial tenancies. This may supersede any dispute resolution process within the lease (based on state laws);
  • requirements to disclose information about a retail premises, including estimating costs of rent, outgoings and other relevant information;
  • attempts by the landlord to unfairly restrict the tenant’s rights to fully enjoy the premises for their intended purpose;
  • limitations on fit-out costs that a landlord can claim according to what extent these costs were disclosed or agreed upon prior to the lease‘s signing; and
  • reduction to the size of the premises (such as during demolition or renovation) without compensating the tenant.

Did you know? Section 18 of the Retail Leases Act 1994 (NSW) states that a provision in a retail lease that says the rent will increase according to the higher of multiple calculation methods is legally void and unenforceable. This means that even if the landlord and tenant genuinely agreed to this process at the time of signing the lease and included it in the lease, neither party can enforce it. If they tried, a court would treat the invalid clause as not existing in the lease and artificially remove it.  

Can the Law Be Amended by the Contents of a Lease?

In very limited circumstances, the law can be amended by the contents of the lease. For example, a landlord and tenant can agree on a slightly amended process for presuming that the other party has agreed to enter into the new lease after issuing a relocation notice. This is set out in 34A of the Retail Leases Act 1994 (NSW). Such amendments typically happen for specific commercial purposes.

Note: It is important to pay attention to what amendments or diversions from the law are allowed, as there may be conditions attached. As an example, in New South Wales, a retail tenant is obliged to provide their lessee’s disclosure statement within seven days of receiving the lessor’s disclosure statement from the landlord. However, a tenant may request that this standard response period is extended. According to section 11A of the Retail Leases Act 1994 (NSW), the landlord can agree to extend (but not shorten) this period of time.

Seeking Legal Advice

How Disputes Occur

Understanding the law and knowing when to get legal advice is important during every stage of a lease dispute. Whilst you should get legal advice before signing a lease, this advice is more general in nature. Therefore, it might not identify or explore in detail the key rights and obligations relevant to the dispute. 

Disagreements between tenants and landlords commonly occur regarding: 

  • the precise obligation and rights of the parties; 
  • whether the original agreement is binding; or
  • whether the parties agree to change the lease in any way. 

Usually, these disputes raise questions of technical legal interpretation and the intentions of the tenant and landlord when signing the lease. 

Hint: If you signed the lease with an understanding that you would receive certain concessions or benefits, but the other party disagrees, a lawyer can tell you what evidence and factors a court might consider when looking to resolve that disagreement. 

Timing is Everything

Getting legal advice before taking decisive action can be critical to ensure you do not increase the amount of risk and liability you face. For example, terminating or walking away from a lease early without a legal right is a serious breach of contract. Therefore, it may result in significant financial losses for the other party. Further, you may legally have to compensate them for this loss, referred to as claiming damages. The courts will try to award damages to put the innocent party back in the position that they would have been in had the defaulting party complied with their obligations under the lease. 

Termination Advice

Disputes regarding the termination of a lease are serious due to the consequences for the parties of wrongful termination, including lost rent or financial losses due to business interruption. 

Suppose you are a landlord and your tenant does not comply with the lease, and you are considering locking them out of the premises. In that case, make sure that the lease allows you to do so before taking such action. In addition, you should consider any other facts or circumstances that might give the tenant a right to access the premises despite any other issues. 

As a tenant, due to the binding nature of the lease and the length of the lease term, early termination of the lease, including by abandonment (simply walking away), without proper legal grounds can result in significant legal and financial liability.

Before taking any termination action, tenants and landlords should seek advice on: 

  • what right or obligation they are trying to enforce or rely upon;
  • the source of that right or obligation in the broader context of the lease;
  • whether they have sufficient legal grounds to exercise or demand that right or obligation based on the factual circumstances (i.e. the merits of the claim);
  • whether the other party has a defence, counterclaim, or valid legal excuse not to comply with demand request; and
  • the consequences of taking action without valid legal justification.

Key Takeaways

The rights and obligations of tenants and landlords can be numerous and varied based on the particular lease agreement. These rights and obligations extend further than the payment of money and should be clarified as much as possible. Further, tenants and landlords should make sure their agreements do not contradict any applicable laws. Otherwise, those sections of the agreements lose their legal enforceability since a current law will override a section of the lease, unless the law allows itself to be varied by agreement.

If a leasing dispute occurs, tenants and landlords should seek advice regarding the enforceability of the relevant sections of the lease to understand the merits of their claim before taking legal action, including to terminate the lease. Failing to do this could result in an unsuccessful claim and compensation for the other party’s losses. If you need assistance with understanding the law relevant to your lease, contact LegalVision’s dispute resolution lawyers on 1300 544 755 or fill out the form on this page.

Frequently Asked Questions

What happens if I do not comply with my tenant obligations under the lease?

This may result in a breach of the lease. A breach may require the tenant to do an action or compensate the landlord or remedy the default. If a serious or ‘material’ breach occurs, it may allow the landlord to terminate the lease. 

What is a breach notice?

A breach notice is a formal letter written by the landlord to notify the tenant of a breach of the lease.

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