WMM Law News

Issue 38, December 2021

The Commercial Lease Guidebook for Landlords - 
because Goliath deserves a good lawyer too!

Acquiring a commercial investment property is often one of the biggest investments someone will ever make.   In order to make the most out of that investment and to avoid costly legal issues that can arise through a poorly drafted lease, landlords are well advised to seek comprehensive legal advice about their lease.

The benefits received from commercial rental income can often be far outweighed by the risks, if a landlord takes a laissez-faire approach to fulsome legal advice.

For example, all it takes is for a poorly drafted and implemented insurance clause to result in a significant financial loss.  The landlord may be liable for the damage as owner, which means years of profit can be completely wiped out in an instant.

This article is intended to be a general guide for landlords/lessors in negotiating a commercial lease, and it follows on from its “sister” article, “Landlord and tenant negotiations… in battles between David and Goliath, it helps if David has a good lawyer”,  published in Issue 35, of WMM News (“WMM Tenant Article”).  That article was written from the perspective of tenants and what considerations are relevant to them.  This article is intended to provide a general guide to some of the important matters for landlords to consider.  

Structuring of ownership and SMSF leases.   Prior to acquiring any investment property, a landlord should consider what form of ownership is the most appropriate in their circumstances.   The purchase of the property, and subsequent lease, can then be implemented with these considerations in mind.   For example, owning an investment property using company and trust structures can provide asset protection benefits and, potentially, tax and accounting benefits.   A landlord must keep in mind that, if they acquire a property in their personal name, then their personal assets will be exposed if they become liable for some form of damage or costs under the lease. 
Some landlords may contemplate purchasing a property through their self-managed superannuation fund to either lease the premises to a third party or to a related party entity undertaking a business.   SMSF leases require special clauses to be included or else the landlord will likely be in breach of the self-managed superannuation laws.

From a tax and duty perspective, it is ideal to have the appropriate structures in place before purchasing the property.

Nature of lease and landlord’s responsibility.   Although not always the case, the landlord is generally responsible for preparing the written lease.   As noted in the WMM Tenant Article, two preliminary recommendations arise when preparing a commercial lease. 

The first matter to consider is whether the lease is required to be a commercial retail lease or, alternatively, a standard commercial lease. 

The second matter is whether the parties want to instruct a law firm to prepare a fit-for-purpose document, or prefer the riskier method of buying a “cookie cutter” lease precedent online and hoping for the best.   We may be biased but, given that a single omitted or incorrectly drafted clause can result in disastrous consequences for a landlord (placing what could be their entire life savings at risk) we recommend landlords seek proper legal advice.

Do I need a commercial property agent to manage the arrangements with the tenant?   This is a commercial decision for every landlord taking into consideration their time constraints, their knowledge of the basic landlord/tenant relationship at law, and their financial situation.  Commercial agents can often save significant time for a landlord in undertaking negotiations with the tenant, noting important dates in the lease like option exercise terms, and monitoring any increases in rent.   Good commercial agents will understand the basic legal obligations of a landlord and prompt the landlord in complying with them.   The landlord must weigh up the benefits of a commercial agent against the additional costs required in appointing them.

Setting the rent.   We recommend that landlords undertake full due diligence to ensure that rent is set at proper market value.   This is often difficult to achieve due to significant pricing differences between suburbs and between types of property.   Landlords can engage an independent valuer to determine market rent to ensure they are maximising their return from the property.

A landlord also needs to take into consideration whether or not the tenant will be liable for outgoings for the premises, including land tax, council rates and water and sewerage charges.   If not considered in setting the rent, this can add significant additional expenses for the landlord.   The lease must also be clear about whether the rate of rent set is exclusive or inclusive of GST.

Respecting your mortgagee.   If a lender has a registered mortgage against the title, the terms of the loan arrangements and the mortgage are often quite comprehensive in respect of what you can and cannot do with the property.   It is important that you keep your lender updated, and receive their consent (where required) in leasing the property, making any changes to the lease, and prior to consenting to the tenant making any alterations to the property.

The tenant – do your research.   As with any investment, the landlord should ensure they undertake due diligence to ensure that the tenant’s business will remain viable, and that they are unlikely to default under the lease.   A landlord should ask, amongst other things:
  • what is the nature of the tenant’s business – is that suitable for the fit out of the premises and the location of the premises?
  • what business experience does the tenant have?   Is this a completely new venture or an established business?
  • can the tenant provide any references or assurances as to their ability to operate the business from the premises?
Ensuring you are protected by obtaining guarantees.   If the tenant intends to enter into the lease other than in their own name, the landlord should ensure that appropriate guarantors are brought into the arrangements, to guarantee the tenant’s performance of their lease obligations.   If the tenant is a company, and there are no guarantors, it can be far more difficult to recover losses in the circumstances of the tenant defaulting under the lease.

Are the chattels, fixtures and fittings properly defined?   It is important that a landlord ensures that their ownership of any chattels, fixtures and fittings is comprehensively set out in the lease to avoid any disputes as to ownership at a future date.

Obtaining appropriate security in the form of a security deposit or bank guarantee.   Most commercial leases require the tenant to provide a security against a default or damage to the premises.   The value of the security and what is reasonable will depend on the circumstances of the landlord and the premises.

Are adequate insurance obligations for the tenant set out clearly?  Ensuring comprehensive insurance obligations are placed on a tenant is extremely important.   If there is any omission or ambiguity in the lease, any damage to the premises or any injury to a third party could result in a significant liability for the landlord.    The tenant is generally responsible for taking out public liability insurance, contents insurance, plate and glass insurance, and business insurance.   Conversely, the landlord is generally responsible for maintaining insurance for the full replacement value of the premises.   The lease must include obligations that the tenant take out insurance with a reputable insurer, note the landlord’s interest as owner on all policies, and to regularly produce certificates of currency as proof that insurance remains current.

Ensuring that tenant is liable for the landlord’s costs in certain situations.   A tenant should be liable for the landlord’s legal and other costs associated with a tenant’s request to amend the lease, any request to assign the lease and any costs associated with the landlord taking action against the tenant for a breach of the lease.

Fitouts and ensuring the tenant is restricted in undertaking modifications.   The landlord must ensure that there are comprehensive clauses about what the tenant can and cannot do in terms of altering the premises.  

Maintenance obligations and obligations upon end of lease.   A tenant is generally responsible for all maintenance costs associated with their use of the premises and any fixtures and fittings.   They should also be liable for any structural repairs to the premises which are made necessary by the tenant’s use or their negligence.   The lease should contain “make good” provisions, ensuring the tenant is obliged to return the premises to its state and condition at the original date of entry into the lease.

Entry into the premises.   The lease must clearly articulate when the landlord is permitted to enter the premises.  This includes their obligations to reclaim the property upon a default.

Indemnity clauses  To reduce a landlord’s liability, it is critical that broad indemnity clauses are included which set the obligations of a tenant in indemnifying the landlord for certain types of liability and damage.

Essential terms.  It is recommended that the lease clearly articulate clauses deemed to be “essential”, justifying immediate termination of the lease by the landlord for the tenant’s breach.

Implementing a comprehensive and fit-for-purpose lease should be an essential consideration in any commercial landlord’s mind.   As this article demonstrates, there are many core matters that must be included in any lease to protect the landlord, else they may find the risk in investing in a commercial property not worth the reward.

How Can We Help?   WMM Law has extensive experience in drafting commercial leases for landlords.   If you, or anyone you know, need expert advice and guidance about these matters, our commercial and property lawyers David Bailey and Jock Denehey can provide you with these requirements.
I’m appointed as an Executor - what do I have to do?
In a number of previous issues of WMM Law News, we have talked about cases where Executors have done something wrong, but what is it that Executors are actually supposed to do? 

An Executor is the person or persons responsible for managing and dealing with a person’s estate after their death, in accordance with their Will.   An Executor is appointed by a person’s Will, and once a Grant of Probate has been issued by the Court, they have the formal legal authority to deal with the estate.

Executor’s duties:   An Executor is tasked with a range of duties, including:
  • arranging for the proper disposal of the body and making funeral arrangements;
  • making an application for a Grant of Probate of the deceased’s Will;
  • determining the assets of the estate, and “calling in” and preserving the value of those assets (including recovering any amounts owing to the estate, and if appropriate arranging for assets to be invested);
  • determining the liabilities of the estate, and arranging for the payment of any debts owed by the deceased (including funeral, testamentary, and administration expenses, as well as any tax liabilities);
  • if any legal proceedings are brought which involve the estate, seeking advice and if appropriate engaging with, and representing the estate in, those proceedings;
  • maintaining accurate accounts for all financial transactions involving the estate;
  • distributing the estate in accordance with the terms of the deceased’s Will; and
  • finalising the administration of the estate.
The role of an Executor is one of considerable responsibility and trust, and can be a significant undertaking.   For this reason, an Executor has overarching duties which they must adhere to when making decisions and taking actions, such as:
  • acting with reasonable care and diligence; and
  • acting in good faith in the best interests of the estate and all of the beneficiaries.  
Who are Executor’s duties owed to?   Executor’s duties are primarily owed to the beneficiaries of the estate.   However, they may also owe duties to other persons in particular circumstances (for example, creditors of the deceased).   

Executors can be held personally liable by beneficiaries for failing to act in accordance with their duties.   Common allegations brought against Executors include favouring some beneficiaries over others, or distributing assets against the directions provided in the Will.   Breaches of duty can also result in the Executor becoming personally liable.   For example, where an estate is fully distributed before all liabilities are paid, it is the Executor (not the beneficiaries) who is responsible to pay those outstanding liabilities.  

A person appointed as an Executor should be mindful of their duties and obligations when deciding whether to accept their role as Executor.   If they decide not to accept their appointment as Executor, this decision should be made at the earliest possible opportunity, before involving themselves in the administration of the estate, and certainly prior to applying for a Grant of Probate.   Once Probate has been granted, only the Court can remove an Executor—they cannot simply resign or pass their duties to another person, and those duties are not limited by time: they remain for life.   

The ongoing nature of the duties of an Executor was illustrated in the recent Western Australia case of O’ Sullivan v O’Sullivan [2021] WASC 168.

The facts:  Jean Mary O’Sullivan died on 8 April 2015.   She was survived by family, including a daughter, Jeannie Franks, and a son, Michael O’Sullivan.  

Jeannie had been Mrs O’Sullivan’s carer for over 10 years, before becoming estranged in the years leading up to Mrs O’Sullivan’s death.   There was a history of estrangement between different members of the family, including between Michael and Mrs O’Sullivan at various times during Mrs O’Sullivan’s life.  

When Mrs O’Sullivan died, she appointed Michael as her Executor.   Michael applied for, and was issued, a Grant of Probate of the Will on 21 January 2016.

Jeannie did not receive a copy of Mrs O’Sullivan’s Grant of Probate (with the Will annexed) until September 2019, and in June 2020, made an application for further provision from the estate.

On 12 November 2020 (nearly five years after the Grant of Probate was issued), leave was granted to Jeannie to make the application out of time.

When Jeannie made this application, Michael, in his capacity as Executor, did not engage with Jeannie or the Court in relation to the application.   He did not appear or take any part in the proceedings.

Held:   The Court described the obligation of an Executor to respond in proceedings in relation to the estate as “a fundamental aspect of an Executor’s duties”.   By failing to respond, Michael had failed to discharge his duties as an Executor, and this justified his removal as Executor.

The Court found that Jeannie was not left with adequate provision, and ordered that she receive the entirety of the deceased’s admittedly modest estate.   Orders were also made removing Michael as Executor, and requiring him to pay Jeannie’s costs of the application.

Relevance in Tasmania:   Though a Western Australia decision, the obligations on Executors derive from common law, and are reasonably consistent throughout Australia.   This case demonstrates the importance of an Executor fulfilling their duties in accordance with the law, particularly where a claim is made against the estate.  
It also illustrates that the role of Executor is not limited by time: if a further estate asset is identified some 10 years after the administration of the estate was thought to be finalised, the Executor must step back into their role to administer that asset.  

Key points for Willmakers:   Willmakers must turn their mind to considering:
  • if you have chosen the ‘right’ person to appoint as Executor;
  • the relationship between the Executor and the beneficiaries;
  • the willingness of the Executor to act; and
  • the complexity of your affairs.
Key points for someone appointed as an Executor:    If you are appointed as an Executor, this case highlights the importance of:
  • considering carefully whether you wish to accept the role of Executor before taking any steps to interfere with or carry out the administration of an estate;
  • being aware of the ongoing nature of the role of Executor, if you choose to accept your appointment; and
  • seeking legal advice if a claim is brought against the estate, or if you are in doubt about your duties and obligations.
How can we help?   WMM Law has specialist skills and experience in estate administration, including advising about Executor’s duties generally, and more specifically assisting Executors with the administration of estates where complex circumstances interact with the duties of an Executor.   Please contact  Kate Moss, Megan BirdLeanne Rama or Sean Oosthuizen if you, or anyone you know, need expert advice and guidance about administering an estate in such circumstances, in a timely, professional and cost-effective manner.

Alternatively, if you need expert advice and guidance about preparing a comprehensive estate plan, including providing advice and preparing strategies for appointing the most appropriate person in your circumstances to be an Executor, please contact our estate planning lawyers Kimberley Martin or Casey Goodman.
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This newsletter contains material for general educational purposes and is not designed to be advice to any particular person about their own affairs as it does not take into account the circumstances of the reader as an individual.  It is recommended that appropriate professional advice be obtained by each reader so that reliance can be taken upon that advice.

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