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Leasing Premises & Equipment

LEASING PREMISES & EQUIPMENT

This fact sheet is general information only.

What is a lease?

A lease is an agreement that allows you or your business (called "the lessee") to use property or an asset owned by another ("the lessor") for a specified period of time, in return for regular payments. The legal ownership remains with the lessor.

Lease or purchase?

An accountant will be able to give you a good idea of the best option. Usually it depends on cash flow. There may also be lease incentives on offer, e.g. a rent free period for leasing premises. It is also important to talk to an accountant about the tax advantages/disadvantages of each option.

Motor vehicle leasing

This usually raises substantially the same issues as other equipment. There is a set amount that can be claimed as depreciation, depending on the use of the vehicle (e.g. hire cars might allow greater depreciation value). It is now common for businesses to use the services of fleet operators to alleviate the administrative complexities of running a car fleet.

Leasing premises

Most businesses will choose to rent premises. The relationship between the landlord and tenant will be regulated by the lease and, if the business is a retail business in premises under 1,000 square metres then the Retail Leases Act may also apply.

In the lease you can expect to find clauses that deal with (among many other rights and duties):

  • the amount of rent;
  • the length of the lease and ways it can be extended;
  • whether it is for a fixed term or "periodic" i.e. on a monthly basis, although this is usually the fallback position following the end of a fixed term lease that has expired, which will then continue on a month by month basis;
  • the landlord's obligations with regard to repairs and maintaining the good repair of the premises;
  • whether there is an option to renew the lease for another fixed term e.g. a five years lease with a three year option (the option period for renewal may be for a shorter period than the original lease). This is something you should have, because it allows you to maintain the goodwill you have worked hard to establish in a particular location and the option belongs to the tenant. It is usual for the option to be exercisable by a particular time before the end of the tenancy period. It may also be subject to an agreed change in the conditions of the lease;
  • the types of business activities you can carry on in the premises, which may include restrictions (or prescriptions) on hours/days of operation (this is particularly prevalent in shopping centres and leases for some franchise operations);
  • parking for the use of the landlord;
  • the proportion of rates and other expenses that are shared between the landlord and tenant;
  • the landlord's right to enter the premises;
  • the consequences of any breach of the lease;
  • insurance obligations;
  • the rights to assign the lease to other tenants. This is very important if you want to be able to sell the business, and may spell out whether you continue to have obligations to the landlord after the assignment;
  • the right to install fixtures and fittings.

Make sure you get legal advice before you sign a lease, the solicitor will be able to explain the obligations in the lease and negotiate some of the terms of the lease.

Rent

It's important that a solicitor looks at the rental clause of a shopping centre lease (in fact, you should get advice on every aspect of a commercial lease). This is because commercial rents in shopping centres are often calculated on the basis of a percentage of sales or the business income, together with a base rental that does not vary.

There are a number of formula that are used to calculate rent, and you should understand the consequences. Also, increases in rent may be calculated in different ways (e.g. CPI increases).

Repairs

Tenants usually have an obligation to repair, although the landlord may be liable for structural repairs and for inherent defects. Generally the tenant is required to maintain the premises in the same condition as at the start of the lease, but should not be responsible for fair wear and tear.

Make sure you carefully check the conditions of the lease that cover the responsibility to repair the premises. It is important to get legal advice about this. For example, if the premises are not able to be used due to a fire, will you be able to suspend the payment of the rent until the premises is again habitable? Does serious damage allow you to terminate the lease? If you fail to meet your obligations to repair can this lead to a termination of the lease?

The Retail Leases Act

The Retail Leases Act only covers retail premises. These are defined in the Act. The law sets out certain minimum requirements, such as:

  • a minimum term of five years for a new lease;
  • (where the lease is more than twelve monthes) requiring notice to be given to the tenant in relation to renewal, between six and twelve monthes before the end of the lease;
  • the tenant must be given a disclosure statement (including information on the premises, rent, outgoings etc) at least seven days before the lease is signed;
  • the lessor can recover the reasonable costs of the preparation of the lease;
  • adjustments to base rent and reviews to current market rents are regulated by the Act. Make sure you understand the basis on which the rent may be adjusted - this may be complicated;
  • the recovery of outgoings by the lessor is regulated by the legislation, and must be disclosed before entering into the lease;
  • the lessor is severely restricted in their ability to withhold consent for the assignment of a retail shop lease;
  • resolving disputes through mediation via the Registrar of Retail Tenancy Disputes.

Costs

The sorts of costs associated with the lease include:

  • legal fees for preparing the lease;
  • stamp duty;
  • registration at the Land Titles Office, this is optional, but gives a tenant security;
  • other costs, such as, photocopying, postage etc.

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