What Does Permitted Use Mean in a Lease?
It can be a minefield to navigate through the different terms within a commercial lease. One of the terms that you may have come across might be the ‘permitted use of premises’. But, what does this even mean? This article will explain the key things that you, a tenant, should consider regarding permitted use before you enter into a commercial lease.
What is Permitted Use?
The permitted use in a lease is how you are allowed to use the premises during the term of the lease. The landlord will usually explain this in a schedule to the lease and in any letter of offer or heads of agreement.
For example, the permitted use in a lease might say ‘cafe’. You must then comply with this use throughout the lease and only run a cafe on the premises. Failure to do so may amount to a breach of the contract. Therefore, the landlord can terminate the lease.
Although this may sound relatively straightforward, permitted use can raise some complex issues.
Broad Definition
Having a broad definition of permitted use within the lease is desirable for most tenants. This allows you to expand your business.
For example, consider the above permitted use of a ‘cafe’. Does the description of ‘cafe’ also allow you to use the premises as a restaurant or bar? What about if you wanted to add a small gift shop section inside your café to increase business? Are you allowed to do this under a lease that simply states ‘cafe’ as the permitted use?
Therefore, a broader permitted use definition of ‘Restaurant/Cafe/Retail Sales and any other use agreed by the parties in writing’ would offer you far more flexibility.
Broad definitions are particularly advantageous if you plan to sublease part of the premises or assign the lease at some point in the future.
Landlord Considerations
If the landlord owns more than one premises in a complex, the terms surrounding permitted use may infringe on any exclusivity that they have 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 get around this by not agreeing to offer exclusivity to any tenants in the complex. However, exclusivity can be desirable for you so the landlord should weigh up these different issues.
Furthermore, the landlord should consider both your use and any other relevant laws. This may include local council planning laws or liquor laws.
In the example of the ‘cafe’ discussed above, you should consider whether the premises are licensed to sell alcohol before signing onto the lease.
Tenant Considerations
Broader definitions regarding the permitted use of premises are more beneficial for a tenant. This is especially the case when you are looking to:
- expand your business offerings;
- sell your business; or
- assign the lease.
For example, a tenant might start to offer pre-packaged coffee for their customers in a cafe. This means that a retail component is required in the lease. If the tenant wants to sell the business or assign the lease, the landlord might stop the new tenant from selling coffee. However, if the new tenant bought the business on the presumption that they could sell coffee, they may bring legal action to the original tenant.
Retail Leases
You should also consider how permitted use laws apply to retail leases. Each state and territory in Australia have individual retail leasing laws that define what is regarded as a retail shop.
If your lease’s provisions lend itself to the fact that the lease is a retail lease, you will need to consider whether your business is actually a retail shop. If not, your business will likely fall under a commercial lease instead. It is important to be aware of exactly what type of lease you have as the relevant laws are crucial if a dispute arises in the future.
Key Takeaways
The area of permitted use can be difficult when your business undertakes a range of activities. Before you agree to a permitted use clause and enter into a lease, you should check that the lease has been carefully drafted.
You should give careful consideration to your proposed use of the premises both now and if you wish to expand in the future. If you have any questions about the permitted use of premises, contact LegalVision’s leasing lawyers on 1300 544 755 or fill out the form on this page.
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