Wednesday, 12 December 2012

Australia: Commercial leasing in Canberra - capitalising on local expertise in a unique market

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Australia: Commercial leasing in Canberra - capitalising on local expertise in a unique market
Landlord and Tenant Alert

10 December 2012
Article by Jason Wenning
Focus: Commercial leasing in Canberra
Services: Property & Projects
Industry Focus: Property
Squabbling politicians and the 'Bush Capital' moniker do little to draw positive attention toward the nation's capital. Yet, with a thriving public sector and population growth second only to the sand gropers of Western Australia, there are opportunities aplenty within the city of round-abouters.
Unbeknown to many, the Australian Capital Territory houses the third largest office market in Australia, behind Sydney and Melbourne. This rather niche commercial property market has been overlooked by many nationwide investors. However, since the introduction of Mandatory Disclosure in 2010, coupled with the National Green Leasing Policy, the Commonwealth and Territory Governments have driven industry investment in the ACT through their push to occupy energy efficient buildings. Those investors, willing to either develop new 'Green Buildings' or substantially renovate aged building stock, have benefited greatly from high rental yields and secure office tenancies.
The ACT's industrial leasing market has attracted investors from far afield, all seeking to benefit from the Territory's resilient construction industry. With further residential land releases promised by local government in 2013, the outlook for both the industrial and retail sectors looks promising. Each land release brings with it the opportunity to 'capitalise' on the emerging suburban town centres, offering the ability for businesses to secure affordable retail space outside the CBD. As the city with the nation's highest average individual income, Canberra has seen strong and sustained retail growth. This has spurred increased interest from retailers, especially supermarkets, stores spruiking household products and traders of building supplies.
What does all this mean? Well, the word on the street is that the ACT has now merged out of the slip lane and is gearing up to a market well supported by both national and international investors.

The legislation

Inherent in any business venture is the need to be conscious of the requirements of compliance. In the 15 years since the Reid Committee reported on the prospect of uniform leasing legislation across all jurisdictions, little has changed. While unfortunately many of the Committee's recommendations were not adopted or practicable, the report highlights to industry stakeholders just how difficult compliance can be across jurisdictions. In the words of the Productivity Commission: 1
'Although the broad architecture of retail tenancy legislation or codes is similar across Australia, there are significant differences in detailed provisions and application between jurisdictions, and indications are that policies and regulations across jurisdictions will diverge further.'
The ACT legislature has pieced together leasing legislation that, on its face, resembles that of the other jurisdictions, yet, on closer analysis, differs in many significant aspects. The Leases (Commercial and Retail) Act 2001 (ACT) seeks to regulate commercial leasing in the ACT. Unlike the statutes in other jurisdictions, which are generally confined to 'Retail Premises', the ACT legislature has broadened the traditional ambit of the legislation to include:
  • commercial premises with a lettable area of 300 sqm or less;
  • premises leased to an association;
  • premises leased to charitable organisations;
  • premises used to provide a combination of business accommodation and secretarial services (potentially very broad);
  • child care centres;
  • sports centres;
  • art galleries; and
  • gardening supply centres,
in addition to premises used, or able to be used, for a retail purpose. All stakeholders should therefore familiarise themselves with the local nuances that characterise the ACT's commercial leasing legislation.

The consequences

Many clauses that are mainstays of non-retail leases in other jurisdictions are inconsistent with the ACT legislation and are thus void, for example:
Ratchet clauses: discretionary rent review clauses, whereby rent is reviewed in accordance with whichever of two or more methods would produce the highest result, are void;
Rental bond: bonds must not exceed a sum equivalent to three months' gross rent;
Outgoings: the nature of all recoverable outgoings together with estimates must be provided to tenants prior to entering into the lease and at least one month prior to each accounting period. Depreciation and capital expenditure are not considered recoverable outgoings;
Key money: the receipt by the landlord of key money from the tenant is prohibited (i.e. money or a benefit passing to the landlord from the tenant so as to secure the grant of a lease);
Personal guarantees: continuing guarantee clauses are void as guarantors are released from further obligations under a lease once the lease is assigned; and
Assignment: restrictions on the ability of a Landlord to withhold consent.
The ACT legislation also affords tenants certain rights, which cannot be contracted out of. For example (non-exhaustive, of course):
  • a minimum five year lease term (unless a solicitor's certificate is provided);
  • a requirement for the provision of a Disclosure Statement fourteen days prior to entering into the lease (unless a solicitor's certificate is provided);
  • a prescribed method for terminating a tenancy;
  • a right to compensation for disturbance; and
  • a right to renew the lease (applicable only to premises located in the retail area of a shopping centre).

The deal breaker

The application of stamp duty to leasehold transactions in the ACT is a potential minefield for the uninitiated. While short term commercial leases are now exempt from duty, long term leases (those with a total term, or continuous occupation, of thirty years or more) still attract stamp duty at ad valorem ('conveyancing') rates. Tenants and landlords are urged to seek legal advice prior to entering into any long term leasing arrangement.

The end

The matters mentioned above are a sample only of the many potential pitfalls that may befall a hurried or ill-informed entrant to the ACT's expanding commercial leasing market. Professional advice and a well-crafted commercial lease remain the keys to 'capitalising on the Capital', as it steadily morphs into a cosmopolitan centre capable of catering for the needs of commerce on a national scale.
1 Productivity Commission 2008, The Market for Retail Tenancy Leases in Australia, Inquiry Report no. 43, Canberra.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.