Why landlords and
tenants face special risks when leasing strata shops,
offices and industrial premises
When leasing commercial premises in a strata scheme,
landlords and tenants must go beyond the commercial lease to
find their rights and obligations. They must go to the
strata law to find where they stand on important leasing
issues such as building repairs, fit-out, outgoings, use,
trading rights and restrictions. And they find that
decisions on these leasing issues are made by the owners in
the building.
These are the special risks that landlords and tenants
face in a strata scheme.
This article covers four commercial leasing issues for
strata shops, offices and industrial premises-
- Building repairs
- Tenant signage and fit-out
- Strata Levies
- Tenant use and trading
In a process designed to reform the strata law, the NSW
Government has invited submissions from stakeholders
affected by the strata law in a Strata & Community Title Law
Reform Discussion Paper issued on 15 September 2012.
This article contains the submissions we have made to the
NSW Government to address the leasing issues that landlords
and tenants face when renting strata shops, offices and
industrial premises.
Leasing Issue 1 – Building
repairs
Most commercial leases require the landlord to maintain
and repair the building - to keep the structure consisting
of the roof, the ceiling, the floors, the external walls,
windows and doors in a state of good condition and
serviceable repair; and also to maintain the building in a
structurally sound condition; and to maintain essential
services. For example, clause 7.1 copyright Law Society
Lease (NSW).
In a strata scheme, it is the (strata) owners corporation
that owns the building - roof, walls, ceilings and floor
(all as part of the common property). Under section 62 of
the Strata Schemes Management Act, 1996, it is responsible
to properly maintain and keep [the building] in ... good
... repair.
Therefore although the landlord has the obligation to
repair under the lease, it is the (strata) owners
corporation, as owner of the building fabric that is
responsible to carry out the repairs. The landlord is at
risk that the tenant can ask for a rent reduction or rent
suspension if the (strata) owners corporation takes its time
to carry out the repairs. The tenant’s ability to require
the repairs to be carried out is unclear.
Water penetration is a common building defect. In
Decision 2009/106 the Consumer, Trader and Tenancy Tribunal
(NSW) (the “Tribunal”) ordered the (strata) owners
corporation to repair the water pipes which were leaking
above the ceiling of the premises. The Tribunal said that it
did not matter whether the water came from the pipes, the
unit above or elsewhere, the owners corporation was
responsible to carry out the repair at its own cost under
section 62 of the strata law.
Our submission is twofold. Firstly, that the strata law
clearly recognises that the (strata) owners corporation is
responsible to both landlord and tenant to maintain
the building and to carry out the repairs as soon as
practicable. Secondly, that the strata law make it
mandatory that the (strata) owners corporation hold
insurance to compensate the landlord for rent reductions and
suspensions under commercial leases until the repairs are
completed.
Leasing Issue 2 – Tenant
signage and fit-out
Most commercial leases prohibit the tenant from making
structural alterations, and require the landlord’s consent
in writing for signage, fit-out and other alterations. At
the end of the lease, the tenant must make good by
restoring the premises to the state and condition it was
first handed over, fair wear and tear excepted. For example,
clauses 7.2.3, 7.6 & 12.3 copyright Law Society Lease (NSW).
In a strata scheme, the (strata) owners corporation must
consent in writing to the fit-out if it affects the
structure (the common property). Even minor and cosmetic
alterations and installations such as signage, replacing
light fittings, replacing ceilings, kitchen and bathroom
renovations, installing security doors and grilles, wall and
floor tiling, and painting require consent because they
involve drilling into or affixation to the structure.
Model Commercial/ Retail Scheme By-law 3 sets out this
requirement for consent and imposes on the owner (not the
tenant) the obligation to maintain the installation in good
repair; and to repair any damage caused when the
installation is removed.
The procedure is that the landlord applies for consent on
behalf of the tenant. Applications for structural
alterations need to have an engineer’s report to accompany
the application. When the consent is granted, the landlord
is at risk of being held responsible by the (strata) owners
corporation if the building is damaged and for failure to
comply with applicable strata by-laws during the
renovations.
Sometimes, it will be necessary to obtain permission to
install items such as vents or an exhaust system on common
property adjacent to the premises. In Decision 2011/277, the
Tribunal said that it was reasonable to ask for a
by-law for the exclusive use of the external wall of the
premises to affix an exhaust fan and air filtration system
for a restaurant. The Tribunal ordered a by-law, even though
the (strata) owners corporation had opposed it. Such an
exclusive use by-law will include an obligation on the
person benefiting to maintain the items installed in good
repair, and may be enforced by any lot owner (see Decision
2006/441).
Our submission is that the tenant be recognised by the
strata law as being able to request consent for fit-out
works from the (strata) owners corporation directly (with
the landlord’s consent), and be responsible for damage and
compliance with the applicable strata by-laws directly. This
would align strata law with planning law, where the tenant
makes the application to the planning authority with the
landlord’s consent, and is directly responsible to the
planning authority for approval and compliance. Our
submission also is that the Model By-laws include a by-law
for renovations.
Leasing Issue 3 – Strata
Levies
Most shop leases and industrial leases require the tenant
to pay outgoings, which for strata premises will include
strata levies. There are two types of strata levies - the
first is administrative fund levies for day-to-day expenses,
including building insurance, cleaning and maintenance; the
second is sinking fund levies (and special levies) to cover
future capital needs for the building.
Tenants will usually not agree to contribute to the
sinking fund levies, because the upkeep of the building is
not their responsibility.
Our submission is that the sinking fund should remain
separate from the administrative fund, and be designed to
cover the section 62 responsibilities of building
maintenance and repair. If there were one fund only, the
landlord would be at risk that the tenant would refuse to
agree to pay strata levies as a lease outgoing, because the
levies would cover costs for which the tenant is not
responsible.
Leasing Issue 4 – Tenant
use and trading
Most commercial leases require the tenant to pay for
utilities, if separately metered. Electricity, gas and
communication lines are usually separately metered, but
often water and drainage is not. The bills for utilities not
separately metered are the responsibility of the (strata)
owners corporation. The conflict that arises if the tenant
has a business with a high water usage and drainage can be
resolved by the installation of a meter.
Most commercial leases contain tenant use and trading
provisions. These provisions allow access and car parking in
specified places; restrict the tenant to a specified use;
require the tenant to keep the premises clean and to dispose
of waste properly; and to comply with strata by-laws and
planning consents and licences. For example, clause 6.1
copyright Law Society Lease (NSW).
The strata law implies a covenant into a lease to comply
with the by-laws of the strata scheme (section 44) which
covers the same tenant usage and trading provisions. The
Model Commercial / Retail Scheme By-laws and the Industrial
By-laws (which are the same) deal with all of these
requirements and restrictions, in much greater detail than a
lease will normally contain. The (strata) owners corporation
can enforce compliance with its by-laws independently of the
lease.
The way that the (strata) owners corporation may decide
to act to enforce the by-laws may not suit the landlord or
tenant, particularly if the result is that they are forced
to spend money or the tenant has no choice but to leave.
In Decision 2004/713, the Tribunal ordered the owner of a
restaurant to upgrade the ventilation system to comply with
current Australian Standards, failing which the owners
corporation was authorised to disconnect the electric power
supply to the system.
Our submission is that Notices to Comply issued by the
(strata) owners corporation for breach of by-laws be
addressed to both the landlord and tenant, and both have the
right to respond; and the landlord be given the opportunity
to deal with it under the lease. Also, the (strata) owners
corporation should be required to notify the tenant of any
proposed changes of by-laws, and give the tenant a copy of
new by-laws as they are passed.
Footnote Watch this space! The NSW Government has set a timetable
which extends until September 2013 to consider changes to
the strata law, and to introduce legislation.
This article was first published by Cordato Partners in
Lexology which is an international innovative, web-based
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