What is Permitted Use of Premises?

Commercial and retail leasing (Leasing) can be a minefield, and we at LegalVision are all too familiar with helping clients navigate that minefield. This article focuses on one small element of Leasing – the Permitted Use of Premises in a Lease.

What is Permitted Use?

In simple terms, the Permitted Use in a lease is how the Tenant will use the Premises during the Lease’s term. The Landlord will usually spell this out in a schedule to the Lease, for example, “Café”.

The Tenant must then comply with this use throughout the term of the Lease. Failure to do so may amount to a breach, and the Landlord can terminate the lease. Although this may sound relatively straightforward, Permitted Use can raise some complex issues.

Broad Definition

A broad definition of Permitted Use is desirable for most Tenants. This allows a Tenant to expand their business.

By way of illustration, consider the above example of a Café.  Does the Permitted Use description, “Café”, also allow the Premises to be used as a Restaurant, a takeaway food shop or bar/ bistro? What about if the Tenant wishes to add a small gift shop section inside their Café to increase business? Does the Lease permit this?

A broader commercial use of “Restaurant/ Café/ Retail Sales and any other use agreed by the parties in writing” may offer the Tenant more flexibility. Particularly if part of the Premises are to be sub-leased or the Lease is to be assigned sometime during the Lease term.

Landlord Considerations

If the Landlord owns more than one premises in a complex, it must be careful that the Permitted Use does not infringe on any exclusivity of use granted to other Tenants in the complex. For example, a Hairdressing Salon offering the sale of Beauty Products may infringe upon an existing tenant who operates a Beauty Salon with exclusive use.

The Landlord may wish to get around this by not agreeing to offer exclusivity to any Tenants in the complex. However, exclusivity can be desirable to Tenants and this is often a balancing act for the Landlord.

The Landlord should also consider the Tenant’s use and any other relevant laws, such as local council planning laws or liquor laws. In the example of “Café” used above, it would be useful to consider whether licensed premises were permitted.

Tenant Considerations

As we touched on earlier, the broader the definition, the better for a Tenant, particularly where the Tenant is looking at selling their business and/or assigning the Lease during the Term of the Lease.

The Permitted Use, unless the Landlord agrees to vary this, might impact upon the Tenant’s chances of selling their business in the future.

Retail Leases 

Landlords and Tenants should also consider Permitted Use as it applies to Retail Leases. Of note, each state and territory in Australia has its individual Retail Lease legislation that defines what is regarded as a retail lease/retail shop.

If the Permitted Use lends itself to the fact that the lease is a retail lease, consideration will also need to be given as to whether the Lease is a retail lease or commercial lease.

This would be an important distinction if a dispute were to arise in relation to the Lease in the future.

LegalVision’s Quick Tips

As forewarned, the area of Permitted Use can be a minefield.

We suggest that before either party agrees to a Permitted Use and enters into a lease that:

• Landlords have their leases carefully drafted; and
• Tenants have a leasing lawyer review the lease

While Permitted Use may seem an innocuous concept, the wrong Permitted Use can have far-reaching implications, and you should seek legal advice.

***

LegalVision has a team of experienced commercial leasing lawyers who can assist you. Please call our office on 1300 544 755 and we would be delighted to answer any of your questions or advise you on your commercial lease.