A Lease Heads of Agreement is an essential first step in entering into a Lease, whether that be a retail or a commercial lease agreement.
There are several key essential commercial terms that should always be included in the Heads of Agreement, which is typically prepared by the agent acting for the Lessor / property owner.
Once the Heads of Agreement is agreed, a formal Lease is prepared and signed by the parties.
The parties can still negotiate the terms of the Lease which are not included in the Heads of Agreement terms.
Essential Heads of Agreement terms
The Heads of Agreement terms typically include:
- Property address / folio / any separate car parking spaces / common area use;
- Annual / monthly rent payable (*plus GST);
- Method of annual rent adjustments, market rent / fixed percentage increase / consumer price index CPI;
- Financial incentives / rent free period / rent reductions over term of Lease / Lessor contribution to fit out;
- Security bond / bank guarantee
- Personal guarantees if Lessee is a company;
- Duration of Lease Term, with any option to extend Lease Term;
- Lessee responsibility to pay Lessor Outgoings in addition to Rent (not including the utility charges incurred by the Lessee i.e. water / electricity). The Lessor outgoings would include building insurance, land tax, waste management cleaning services, management fees, levies;
- Relocation or demolition clauses;
- Fit-out contributions or requirements for the use of premises and obligations to make good / restore premises to pre Lease condition at end of Lease.
Binding Heads of Agreement
A Heads of Agreement can be binding by way of agreement between the parties, and depends on the intention of the parties, not just the wording contained in the Heads of Agreement as to being a binding agreement or otherwise. The essential terms of the Lease are required to be agreed, as itemised above, for a Heads of Agreement to be binding upon the parties.
Whilst the terms of a Heads of Agreement are generally not legally binding, there are some circumstances where it can become a legally binding document. This would depend on the intention of parties and if there are certain contractual elements that are met and satisfied.
Often the Lessor will insert other terms in a Heads of Agreement and final Lease Agreement, which will remain subject to negotiation between the parties.
Contractual certainty takes priority over contractual intention when determining whether a Heads of Agreement is to be binding upon the parties. See Casdar Pty Ltd v Joseph Fanous [2017] VSC 616 .
The most important consideration when determining whether the Heads of Agreement is binding is the intention between the parties, not the wording of the document. The Courts will consider both pre – and post contractual conduct when considering the parties intention.
Our view is that all Heads of Agreement should be non binding and subject to exchange of a Lease.
Unfair Lease Terms
If a Lease term is unfair, it may be challenged by the affected party, with monetary penalties payable by the party that seeks to rely on those unfair terms, upon a Court determination.
In summary an unfair term is one that, as defined in the Australian Consumer Law: Schedule 2 of the Competition and Consumer Act 2010 (Cth):
- would cause significant imbalance of the parties rights and obligations, that favours one party and not the other i.e unilateral termination rights;
- is not reasonably necessary to protect one party’s legitimate interests;
- would cause detriment, financial or otherwise, i.e. loss of rights if that clause was relied upon, i.e unilateral termination rights.
Retail Leases / Commercial Leases
The Retail Lease legislation provides greater protection for Lessees, which does not necessarily have to be set out in the Lease Agreement.
In New South Wales, a lease will be a retail lease if:
- the premises is less than 1000m2,
- the business is listed in Schedule 1 of the Retail Leases Act 1994 (NSW);
- the term of the Lease is between 6 months and 25 years;
- any business in a retail shopping centre (5 or more shops owned by the same owner);
The protections under a Retail Lease which are not included by law in a Commercial Lease include:
- a copy of the proposed Lease and a Lessor Disclosure Statement, must be provided to the Lessee at the negotiation stage, i.e when the Heads of Agreement terms are being negotiated.
- Lessee not responsible to pay Lessor costs for Lease preparation;
- Security monies must be deposited by Lessor to Retail Bond Scheme and not retained by Lessor, unless a bank guarantee is provided and retained by the Lessor;
- Payment of key money – being monies paid by the Lessee to Lessor not related to rent or security, and only paid by the Lessee to secure the Lease from the Lessor –is prohibited for retail leases;
- Lessor must provide written estimate of outgoings and specify the particular outgoings / expenses, the Lessee is to be liable for in the Disclosure Statement;
- Retail Lease – annual / market rent adjustment – can be for less than the previous rental amount – ratchet provisions that only allow rent to rise, not decrease each year, are void;
- Disputes must be mediated through the NSW Small Business Commissioner prior to the issue of any legal proceedings by either the Lessor or Lessee.
- As from 1 January 2023, Retail Leases now apply to small bars, gymnasiums and fitness centres, regardless of where those businesses are situated, i.e., industrial unit complexes;
- Retail Tenancy Guide – which provides a summary of the Lease process and the parties rights and obligations, must be provided by the Lessor to the Lessee at the negotiation stage and at least 7 days prior to entry into Lease.
If you have any questions in respect of providing or entering into Retail or Commercial Lease, we would be happy to assist with your enquiries. Contact our property Law team on 9635 7966 or through any of the CONTACT US options on this website.
