February 2004

Commercial leases and strata title

Commercial strata title is becoming a common form of property development. Either by way of new construction or converting existing buildings, it allows developers more flexibility by allowing the sale of individual strata lots. As commercial strata title becomes more common, so does leasing of commercial strata title premises.

Whilst many leasing issues apply to all commercial premises, strata title raises its own unique issues which must be dealt with adequately in the lease to avoid later problems both with the tenant and with potential purchasers of the strata lot.

Outgoings

As the premises will have their own separate title, council rates, water rates and land tax will be separately assessed. In addition, normal outgoing items such as security and common area maintenance will be included in strata levies. Accordingly, the outgoings clause should state that:

  • strata levies payable by the landlord to the administrative fund and sinking fund of the Owners Corporation are included in outgoings;

  • the outgoings percentage is 100%.

In summary, always remember the unique features of strata title when negotiating with a tenant.

By-Laws

The lease should contain an express obligation on the tenant to comply with the by-laws of the Owners Corporation.

Where the lease is entered into pursuant to an Agreement for Lease for a proposed strata title building that is still in the course of construction, a copy of the proposed by-laws should be an attachment to the Agreement for Lease.

Strata Legislation

The lease should contain an express obligation on the tenant to comply with the relevant strata legislation such as the Strata Schemes Management Act and the Strata Schemes Freehold Development Act.

Rights of First Refusal/Exclusive Use

Clauses granting rights of first refusal or prohibiting the leasing of other premises in the building for competing uses can cause significant problems in strata title leases if not correctly drafted.

Consider the following example:

The tenant is granted a lease at construction stage of Level 1 of a building. The lease contains a clause giving the tenant a right of first refusal to take a lease of the ground floor of the building.

Once the building is constructed, the landlord registers a strata plan, making Level 1 and the ground level separate strata lots and begins marketing both lots for sale.

This will mean that the tenant's right of first refusal will ultimately be over a strata lot owned by a different landlord than the strata lot the subject of its current lease.

The only way to protect the right of first refusal would be some form of restriction on user over the ground floor strata lot in favour of the Level 1 strata lot. Such a restriction on user will almost certainly have an adverse effect on the sale price of the ground floor lot as it will limit the ability of any purchaser to lease that lot.

The same issues and ultimately the same problem will apply to a clause prohibiting competing uses in the building.

Accordingly, clauses granting rights of first refusal or prohibiting competing uses should ideally not be used in leases for existing strata title premises or in buildings that may potentially become strata title. If the use of such clauses cannot be avoided, clauses should state that they have no effect if the building is converted to strata title and/or the relevant sections of the building pass into different ownership.

Signage

If exterior signage is part of the package agreed with the tenant, remember that the exterior of the building is common property and owned by the Owners Corporation. It is not part of the premises.

If the building is yet to be constructed and converted to strata title, an exclusive use by-law must be drafted and registered on registration of the strata plan. A signage plan showing the location of this signage is recommended for certainty.

If the building is already in existence and strata title, either the landlord or the tenant will need to approach the Owners Corporation for permission for this signage.

Car Parking

If the lease includes the use of car parking, check that the car spaces are included in the actual strata lot. Make sure that the tenant appreciates that it does not have exclusive use of car spaces that are part of the common property and designated as visitor parking.

Insurance

As noted in paragraph 1 insurance of the building and the common areas is the responsibility of the owners corporation and included in the strata levies.

However, a landlord will still need to insure strata lot that includes the premises. Accordingly, clauses requiring the tenant to take out insurances such as public risk, workers compensation etc should be retained.

Strata Conversion of Existing Premises

An existing building can only be converted to strata title if the written consents of all the current tenants are obtained and produced to Land and Property Information. However, there is no statutory obligation on a tenant to provide this consent.

Accordingly, a landlord's standard commercial/retail lease should contain a clause stating that the tenant consents to the conversion and will provide this consent within 7-14 days after a request by the landlord.

That clause should also state that following a conversion to strata title:

  • the outgoings percentage is deemed to be varied to 100%

  • strata levies are included in the definition of outgoings.

Otherwise, it may be extremely difficult to have the strata plan registered or for a landlord to recover all of the outgoings contained in the strata levies without offering the tenant a considerable incentive.

Even if the tenant ultimately agrees, significant delays can occur in the registration of the strata plan and consequently the sale of the relevant strata lots.

In summary, always remember the unique features of strata title when negotiating with a tenant.

If in any doubt, legal advice should be obtained before finalising the terms of the lease.

Author: Hugh Halliday