Archive for the ‘Commercial Law’ Category

When is a guarantee unenforceable?

A guarantee is a binding promise of one person (the guarantor), to be answerable for the debt or obligation of another (the debtor), if that other defaults. Guarantees become enforceable by the person to whom the guarantee has been given (the creditor) when debtors have defaulted on their obligations.

In this article, we consider the circumstances where a guarantee may be unenforceable.

Formal requirements

A guarantee is a contract and will not generally be enforceable unless all the formalities of contract formation have been satisfied. As such, like all other contracts, a contract of guarantee must be supported by consideration passing from the creditor to the guarantor, unless the contract takes the form of a deed.

Typically, a guarantee is given in consideration for the creditor agreeing to enter into some type of agreement with the debtor at the request of the guarantor. Accordingly, a guarantee should proceed the provision of credit otherwise a guarantor can argue that it received nothing in exchange for giving the guarantee and the document will not be binding.

In addition to the above:

  • in states where the Statute of Frauds continues to apply, guarantees are required to be in writing; and
  • if obligations of co-guarantors are joint and several, there is authority that a guarantee is not binding unless each guarantor named in the document executes it.

Enforcement of guarantees

Even if a guarantee has been created in a manner which the law of contract considers to be binding, other laws are available to guarantors to avoid the obligation the guarantor has agreed to take on in the guarantee. These laws, which are discussed below, are found in legislation as well as the common law.

Misleading or deceptive conduct

Like any other contract, a guarantee can be set aside on the grounds that a party has entered into it acting on the misleading and deceptive conduct of the creditor or debtor.

Non-Disclosure

Creditors have a limited general duty of disclosure to a guarantor. Guarantees have been set aside on the basis of a failure by the creditor to disclose unusual information. Furthermore, if a guarantor asks a question of the creditor, the creditor must answer it truthfully. A creditor must also disclose the truth about any misapprehension or unfounded assumption a guarantor may be acting upon.

Duress or Undue Influence

If a guarantee is procured by duress or undue influence by the creditor or debtor, it may be voidable. To succeed, a guarantor would need to show that the provision of the guarantee was not an independent act of the guarantor, acting of its own free will and based on full information.

Married Women

In Australia, where a creditor relies upon the husband to procure his wife’s consent to act as guarantor and there is actual undue influence by the husband, the transaction may be set aside by the wife unless she has received competent and independent advice.

In the absence of undue influence, the Courts have found that it would be unconscionable for a creditor to enforce a guarantee against a wife if she fails to understand the significance and effect of the transaction.

Unconscionable dealing

This is the most utilised ground for seeking to set aside a guarantee. Where it can be established that a guarantor was under a special disability or disadvantage in dealing with a creditor and the creditor seeks to take advantage of this, a court may set aside the guarantee. Examples of circumstances involving unconscionability include poverty, sickness, age, drunkenness and/or illiteracy.

Statutory relief against unconscionable conduct is provided by the Australian Securities and Investments Commission Act 2001 (Cth), the Competition and Consumer Act (Cth), and the Corporations Act 2001 (Cth) and, in NSW, by the Contracts Review Act 1980 (NSW).

Non est factum

This defence focuses on the absence of any consent of the guarantor to the document signed. It is available to those who are unable to read due to blindness or illiteracy and to those who are unable to have any understanding of the significance of the transaction because of some other disability.

Illegality

A contract of guarantee can be unenforceable because of illegality. Some examples include:

  • where the making of the guarantee is expressly or impliedly prohibited by statute; and
  • where the effect of the guarantee is contrary to public policy or infringes public policy.

Conclusion

If you are seeking to obtain a guarantee or become a guarantor, we recommend that you seek legal advice.

If you or someone you know wants more information or needs help or advice, please contact us on 07 3281 6644 or email mail@powerlegal.com.au.

Options to renew in commercial leases – don’t get caught out!

An option clause is a term in a commercial lease that allows a tenant to renew their lease at the end of the original lease period, if they meet certain conditions.

Landlords are not obliged to offer a renewal option. However, it is often in the interests of both parties if they are interested in a long-term commercial relationship.

It is important that you understand the steps you need to take if you want to exercise the option to renew your lease.

How option renewal periods work

Most commercial leases require the tenant to notify the landlord if they wish to exercise an option to renew their lease. For example, if your original commercial lease has a fixed term from 1 July 2022 to 30 June 2025 (3 years), then a 3-year option would cover 1 July 2025 to 30 June 2028.

If you wish to exercise your option to renew correctly, ensure you have notified your landlord:

  • clearly in writing and in accordance with the lease agreement; and
  • within the timeframe specified in your lease (which is referred to as the ‘option exercise window’).

Once you have completed the above steps, your landlord should acknowledge receipt of your decision in writing and start preparing the new lease agreement. They can do this through a new lease with the same terms or by a deed of renewal of lease.

To ensure that the terms of the new lease agreement have not changed to your disadvantage, we recommend you seek legal advice.

The importance of diarising the option renewal period

There will almost always be a time limit on when a tenant can exercise an option to renew which is usually expressed in the commercial lease as a specific date or time period. The usual trend is to allow the tenant to exercise the option to renew from three to nine months before the end of the lease term.

It is important for the tenant not to miss the opportunity to exercise the renewal option as the landlord is under no obligation to renew the lease if the tenant fails to exercise the option.

Courts generally construe option renewal periods strictly

Recent cases show that courts will interpret the timeframe to exercise the option to renew the lease strictly. The Supreme Court has jurisdiction to override the option to renew a lease in the manner required by the lease agreement, however, this is rare. In any event, court proceedings can be very costly.

Provide correct notice – refer to lease agreement and comply with formalities to exercise option

As mentioned above, it is critical to understand the deadline for exercising the option to renew.

Failure to exercise the option in the manner required by the lease agreement, means the tenant will have forfeited their right to exercise the option.

For a tenant to validly exercise their option to renew, they must ensure that the notice is:

  • in the correct format;
  • addressed to the landlord;
  • given and correctly executed by the tenant as named in the lease agreement;
  • served on the landlord within the required timeframe and in accordance with the terms of the lease.

Although providing the correct notice and complying with formalities to exercise an option may seem straightforward, it can become complex. This is why we recommend you seek legal advice from an experienced lawyer.

Conclusion

Exercising an option to renew a commercial lease may seem simple and straightforward. However, this is not always the case. Tenants need to ensure they clearly understand and comply with formalities when exercising their option to renew. Failure to do so can result in a tenant forfeiting their right to exercise the option.

Tenants also need to ensure that the new lease they sign reflects their current lease.

This information is for general purposes only and it is important to obtain professional advice relevant to your circumstances. To ensure you understand your rights and responsibilities regarding exercising an option to renew, we recommend you speak to one of our experienced lawyers.

If you or someone you know wants more information or needs help or advice, please contact us on 07 3281 6644 or email mail@powerlegal.com.au.

A Guide to Buying Commercial Premises

Buying a commercial property (such as a warehouse, office building or retail space) is more complicated than buying a residential property. There are complex contract terms, detailed planning information and additional legal and commercial implications if the premises are leased.

In this article we set out some of the key issues in relation to buying a commercial property.

Contract for sale

The contract will typically be prepared by the seller’s lawyer and will set out the terms and conditions for the sale of the property. Essential terms will include, for example, a description of the property, the purchase price, a list of any fixtures or fittings that are included in the sale and the settlement date.

The contract will also include detailed special conditions which relate specifically to the property and the terms on which the seller is offering the property for sale. These special conditions need to be examined and explained to the purchaser by a lawyer who is experienced in the purchase and sale of commercial properties.

The sale of each commercial property is a unique transaction and general terms in the contract will usually be negotiated and varied by the parties.

Name of the purchasing party

In commercial sales, it is important to ensure that the contract correctly identifies the entity buying the property. There are a number of different entities which can purchase commercial property including individuals, individuals in partnership, companies, trustees of discretionary trusts, superannuation funds or a combination of entities.

If you are thinking about buying a commercial property you should speak with your accountant or lawyer prior to the purchase about the buying entity which best suits your tax or asset protection needs.

If the sale is completed and you decide that someone else should own the property (for example, a trustee of a trust) then this could require a transfer of the property and payment of additional stamp duty and capital gains tax.

Goods and services tax

The sale of commercial premises will often attract GST. Whether or not you are required to pay GST on the sale price of the property can make a significant difference to your cash flow.

GST is generally imposed where a seller is registered or required to be registered for GST and is conducting an “enterprise”. If you are the buyer and registered for GST, you can claim the GST component in your next business activity statement, however, you will need to pay the money upfront to the seller.

There are some exemptions to the application of GST. For example, a seller does not need to apply GST if the property is part of a “going concern”. This might apply if the property is a business premises or a tenanted building. A seller may also be able to use the margin scheme to work out the GST that applies to the sale of the property. This should be detailed in the contract.

When it comes to GST in commercial property it is important to seek advice as it can affect the amount required to be paid at settlement and the stamp duty which is assessed as payable.

Existing leases

A buyer is bound by any leases disclosed in the contract of sale. If you are buying premises subject to a lease you should have the lease reviewed by an experienced lawyer. That is because the specific terms of the lease can have an impact on the commercial viability of the purchase. A lease to a poor tenant, paying under market rent, for a lengthy lease term is a vastly different commercial proposition to a lease to a quality tenant paying market rent.

Due diligence

There are a number of searches and enquiries, including legal, physical and technical, which should be carried out when purchasing a commercial property. These include rates and water search, title search, company search (if the seller is a company), a search of the contaminated land register and land tax search.

A buyer can consider inserting a clause in the contract that the purchase of the property is subject to the buyer being satisfied with its due diligence inquiries, to be undertaken within a specified time.

Conclusion

Purchasing a commercial property is an important investment decision with significant financial implications. A good lawyer can help you negotiate the sale contract and ensure that your interests are protected during the purchasing process.

If you or someone you know wants more information or needs help or advice, please contact us on 07 3281 6644 or email mail@powerlegal.com.au.

Commercial leases – Responsibility for repairs and maintenance

A commercial lease is a legally binding contract that gives a tenant certain rights over a property for a set period of time subject to the terms and conditions set out in the lease. A commercial lease is used when leasing property used primarily for a business.

You should never sign a lease without understanding all of its terms and conditions. If you don’t understand what you are agreeing to you could experience serious financial and legal problems.

General terms

It is rare to find a commercial lease that is prepared by the tenant. It is almost always the landlord that prepares the lease when commercial premises are rented and the terms of the lease will generally strongly favour the landlord. Once the lease is signed the tenant is required to comply with the terms and conditions of the lease during their occupation of the landlord’s premises.

The lease sets out the obligations of the landlord and the tenant and the rights of each during the term of the lease and any options for lease that are exercised after the initial term of the lease has expired.

Commercial leases usually have longer terms than residential leases. This gives the tenant, usually a business, a longer security of tenure and allows them to transfer the lease if they sell the business before the lease has expired. This can be appealing to a buyer of that business to already have the lease in place.

Repairs & maintenance of the premises

The legal obligations of a landlord and tenant in regards to maintenance and repair of the premises are set out in the lease.

In most commercial leases the tenant is responsible for the rented premises including walls, floors, fixtures and inclusions and the landlord requires the tenant to repair and maintain the premises during the lease term.

This will usually not include “fair wear and tear” on the premises, repairs to structural parts of the building or other expenditure of a capital nature (air conditioning, walls and the landlord’s plant and equipment).

The landlord is generally responsible for repairing and maintaining major structural aspects of the building including the roof and the building systems contained in it such as common areas and lifts.

Items such as air-conditioning, cool-rooms, heating fixtures and wall partitioning should be carefully defined in the lease to avoid costs and disagreements as commercial leases are often silent on items such as air-conditioning and cool-rooms which are capital items but used by a tenant in their day-to-day business.

Fixtures such as refrigeration and plant and equipment should be repaired by the landlord but a tenant should ensure that this is written into the lease as it is not an automatic obligation.

Avoiding disputes – common scenarios

The majority of disputes that arise between landlords and tenants and the issue of who is responsible for repairing or maintaining the premises arise out of interpreting the terms of the lease, in particular what is meant by “maintenance” and “repair” and sometimes what is “structural”.

Structural repairs include repairs to the building support system and foundations, flooring and ceiling structures, column support, walls and roof but not partition walls, internal stairways, decorative features such as carpeting and sometimes plumbing depending on the building.

A “repair” is generally defined as an act necessary to fix something that has been damaged, whether accidentally or as a result of continued use. If a tenant or their staff or customers damages part of the premises the tenant is always responsible for the repairs needed to reinstate the item. It is when an item, say a latch on a cool-room door that is used frequently, wears out and requires repair that the landlord and tenant may not agree about who should fix it.

The landlord may say that the latch was damaged due to the tenant’s lack of care or proper or regular maintenance and the tenant may say that it was faulty or had reached the end of its useful life. Disputes may arise and cost the parties time and money so it is best to ensure that the lease is specific in the areas where the potential for disagreement exists.

“Maintenance” is generally considered to be the taking of some action to delay wear and tear or deterioration or breakage of an item. For example cleaning and servicing of plant and equipment or proper disposal of waste and garbage. The common exception from “wear and tear” is where non-structural items such as carpeting have deteriorated over time and should be replaced by the landlord.

If a lease specifies that the tenant clears the drains, for example, and there is a plumbing issue the landlord may say that the reason the drains failed was that the tenant did not do proper maintenance. The tenant may say that the plumbing is old and needs updating and then a dispute exists about who is to fix the costly plumbing problem.

Both parties can lessen the likelihood of dispute by undertaking a full inspection report of the premises and both signing off on the report. This will establish and document what condition the premises was in prior to entry of the tenant and should be carried out and updated yearly.

A commercial lease should contain clear obligations and well-defined standards for the repair and maintenance of the premises under the lease to reduce the risk of dispute and misunderstanding between the parties.

The law is not always clear in this area particularly with regards to repairs and maintenance obligations. Even where legislation may say that a repair is the landlord’s obligation the lease (written by the landlord) can change this and make the tenant responsible. Each party should therefore ensure that they receive their own legal advice to ensure their best interests are protected in the lease.

If you or someone you know wants more information or needs help or advice, please contact us on 07 3281 6644 or email mail@powerlegal.com.au.

Commercial Litigation

Commercial law, also known as business law, is the body of law that applies to the rights, relations, and conduct of persons and businesses engaged in commerce, merchandising, trade, and sales

What is “Commercial Litigation?”

Commercial litigation is a general term that applies to any type of litigation or dispute related to business issues. Examples of areas included under the general heading of commercial litigation include:

  • Agreements Limiting Competition:One of the circumstances is a person who is employed as an agent, servant or employee may agree with his employer to refrain from carrying on or engaging in a business similar to that of the employer within specified parishes or municipalities. Disputes surrounding Non-competition, non-solicitation, and non-disclosure agreements by former business owners and employees may result in lengthy litigation. These matters often include requests for emergency relief such as a restraining order or pre-trial injunction.
  • Misuse of Intellectual Property:Consideration of whether information fits within this definition involves things like the extent to which the information may be known outside of the business, the value of information to the business or its competitors, ease of which the information can be acquired, etc. However, there is a second component of the definition which is often overlooked. To constitute a trade secret, the information must be subject to efforts that are reasonable under the circumstances to maintain its secrecy. Thus, information that may have the intrinsic characteristics of a trade secret can lose this cloaking because of the action of the owner in not securing it. Other forms of protected intellectual property are patents, copyrights, trademarks, trade dress, and service marks.
  • Fraud and Deceptive Trade Practices:Some companies may misrepresent their products and services in a business transaction. There are consumer protection laws that also protect companies, investors, and possibly your company’s clients. There are numerous federal and state laws addressing deceptive practices where the prevailing party can recoup damages and legal fees.
  • Abuses of Trust:When dealing with other professionals who received sensitive information of a company’s condition or members, a fiduciary relationship may ensue that requires a higher degree of responsibility and trust. These individuals may include internal managers, or third-party contractors, as well as investors, agents, trustees, partners, or majority shareholders.
  • Employer/Employee Disputes:Issues surrounding overtime, disabilities, health and pension benefits, and discrimination (age, race, and gender) can bring a thriving business to a complete holt if not addressed and mitigated appropriately.
  • Breach of Contract:Vendor disputes or denial of coverage by insurances companies can result in heated litigation. Purchases and sales of securities, transactions in real estate and other business assets, and agreements to provide goods or services. In many cases a promissory note, guarantee agreements, and mortgages/deeds of trust may need to be called in.
  • Tortuous Interference with Contract: A third party’s hindering or preventing performance of an agreement.

The list gives you an idea of the broad scope of commercial litigation. It also provides an idea of how commercial litigation matters can range from relatively simple, uncomplicated matters, to highly complex matters. Improperly handled litigation can lead to additional, unnecessary expenses for you and your business. If you lose, you may be subject to a large damages award. In addition, even if you are successful, the amount of money and time you spent fighting may exceed the amount of damages you are ultimately able to collect. Further, protracted litigation can have a negative impact on the operation of your business.

Commercial transactions and business relationships often go bad and turn into disputes, resulting in costly litigation. If you are unable to resolve the dispute through negotiations or discussions between the parties, one party may find that litigation is the only way to end the matter. Unfortunately, litigation is often a fact of modern business life. When you are faced with commercial litigation issues, you need the assistance of an experienced commercial litigation lawyer.

If you have any questions or would like to speak with one of our Solicitors, please contact us.

Retail Shop Leases

BEFORE YOU SIGN !

Make the time and effort to ensure that the Retail Shop Lease agreement contains all of the terms and conditions you require for the use of the property before any lease document is signed. All Retail Shop Lease documents should be reviewed before you commit yourself to the obligations and responsibilities in the document.

Before signing any lease document, contact us to review your lease documents so that we can minimise the risks and maximise your opportunities. The recommended practice is for the Landlord to give possession of the property to the Tenant only after all documentation is signed and exchanged and the initial rent, bond and costs are paid.

RETAIL SHOP LEASES ACT

The first question to be answered when reviewing a Lease is whether the Retail Shop Leases Act applies to the lease. We have provided some useful links on this page regarding retail shop leases.

Some common terms:

Lessor or Landlord: the owner of the premises

Lessee or Tenant: the person, company or trust renting the premises.

Assignor: the Tenant who transfers their interest in the lease to someone, eg when selling a business conducted on leased premises

Assignee: Someone who takes over an existing lease from a tenant > eg, when buying an existing business carried on at leased premises.

RSLA: Retail Shop Leases Act

DISCLOSURE OBLIGATIONS

Retail Shop Leases Act imposes strict disclosure obligations upon both the landlord and the tenant, which we summarise below:

  1. Lessor’s disclosure obligationAt least 7 days before a prospective lessee of a retail shop enters into a retail shop lease (the disclosure period), the lessor must give to the person a draft of the lease and a disclosure statement.

    If the lessor does not comply or gives a defective disclosure statement, the lessee may terminate the lease within 6 months after the lessee enters into the lease and the lessor must pay the lessee reasonable compensation for damage suffered. Different obligations apply for a major tenant & there are some limitations and exceptions to these disclosure obligations.

  2. Lessee’s disclosure obligationBefore entering into a retail shop lease, the prospective lessee must give the lessor a disclosure statement.
  3. Assignor’s & Assignee’s disclosure obligationsAn assignor must give a prospective assignee a disclosure statement at least 7 days before asking the lessor to consent to the assignment.

    An assignee must give a disclosure statement to the assignor before the lessor is asked to consent to the assignment.

  4. Lessor’s and Assignee’s disclosure obligationsAt least 7 days before an assignment of a retail shop lease is entered into (the disclosure period), the lessor must give the prospective assignee a disclosure statement (Section 1 above) and a copy of the lease. Different obligations apply for a major tenant.
  5. Legal advice reportA prospective lessee or assignee of a retail shop (excluding a major lessee) must obtain a legal advice report from a Lawyer. The Lawyer must review the entire lease and provide the tenant with comprehensive advice before providing the report. The tenant must provide that report to the Landlord.
  6. Financial advice reportA prospective lessee or assignee of a retail shop (excluding a major lessee) must obtain a financial advice report from an Accountant. The Accountant must review the entire lease and provide the tenant with comprehensive advice about the financial costs of the Lease before providing the report.
  7. Effect of failure to comply with obligationsIf a required document is not provided and the relevant lease or assignment is entered into, a retail tenancy dispute exists and the affected person, within 2 months, may ask the tribunal for an order that the document be provided.
  8. Lessor to give lessee certified copy of leaseWithin 30 days after a retail shop lease is signed by the parties, the lessor must give the lessee a certified copy of the signed lease.

COSTS & OUTLAYS

Government Fees

Tenants must pay standard State and Local Government charges. These include include registration fees for: the lease, mortgage consent fees, survey fees, and sketch plan examination fees.

There is no stamp duty payable on a Lease.

Legal Costs

After confirming your leasing requirements, we can inform you as to the costs involved in arranging your lease. Legal costs for preparing a retail shop lease are paid by the landlord. In all other cases they are paid by the tenant.

If you have any questions or would like to speak with one of our Solicitors, please contact us.

Commercial Leases

Commercial Leases differ from the more common residential variety, and before you sign anything, make sure you understand and agree with the basic terms of the lease, such as the amount of rent, the length of the lease and the configuration of the physical space.

How Commercial Leases Differ From Residential Leases

It’s crucial to understand from the outset that, practically and legally speaking, commercial leases and residential leases are quite different. Here are the main distinctions between them:

  • Fewer consumer protection laws. Commercial leases are not subject to most consumer protection laws that govern residential leases – for example, there are no caps on security deposits or rules protecting a tenant’s privacy.
  • No standard forms. Many commercial leases are not based on a standard form or agreement; each commercial lease is customised to the landlord’s needs. As a result, you need to carefully examine every commercial lease agreement offered to you.
  • Long-term and binding. You cannot easily break or change a commercial lease. It is a legally binding contract, and a good deal of money is usually at stake.
  • Negotiability and flexibility. Commercial leases are generally subject to much more negotiation between the business owners and the landlord, since businesses often need special features in their spaces, and landlords are often eager for tenants and willing to extend special offers.

Before you sign a lease agreement, you should carefully read its terms to make sure the lease meets your business’s needs.

First, consider the amount of rent — make sure you can afford it — and the length of the lease. You probably don’t want to tie yourself to a five- or ten-year lease if you can help it; your business may grow faster than you expect or the location might not work out for you. A short-term lease with renewal options is usually safer.

Also think about the physical space. If your business requires modifications to the existing space — for example, adding cubicles, raising a loading dock, or rewiring for better communications — make sure that you (or the landlord) will be able to make the necessary changes.

Other, less conspicuous items spelled out in the lease may be just as crucial to your business’s success. For instance, if you expect your camera repair business to depend largely on walk-in customers, be sure that your lease gives you the right to put up a sign that’s visible from the street. Or, if you are counting on being the only sandwich shop inside a new commercial complex, make sure your lease prevents the landlord from leasing space to a competitor.

Critical Lease terms

The following list includes many items that are often addressed in commercial leases. Pay careful attention to terms regarding:

  • the length of lease (also called the lease term), when it begins and whether there are renewal options
  • rent, including allowable increases (and how any increase will be calculated) and how they will be calculated
  • is turnover rent payable (eg a percentage of the turnover income of your business)
  • whether in addition to rent you will have to contribute to insurance, property rates, and maintenance costs (these are known as outgoings); or whether you will be charged for these items separately (called a net lease)
  • the security deposit or bond and conditions for its return
  • exactly what space you are renting (including common areas such as hallways, rest rooms etc)
  • whether there will be improvements, modifications (called fit outs when new space is being finished to your specifications), or fixtures added to the space; who will pay for them, and who will own them after the lease ends (generally, the landlord does)
  • specifications for signs, including where you may put them
  • who will maintain and repair the premises, including the heating and air conditioning systems
  • whether the lease may be assigned or subleased to another tenant
  • whether there’s an option to renew the lease or expand the space you are renting
  • if and how the lease may be terminated, including notice requirements, and whether there are penalties for early termination, and
  • who is responsible for payment of legal costs and Government fees such as registration fees, mortgagee consent fees,
  • whether disputes must be mediated or arbitrated as an alternative to court.

Costs and Outlays

Legal Costs

In commercial leases, it is usual for the lessee/tenant to pay the lessor/landlord’s costs of and incidental to preparation of the Lease document. After confirming your leasing requirements, we can inform you as to the costs involved in arranging your lease.

Government Fees

In addition, lessees/tenants must also pay standard State and Local Government charges. These include registration fees for: the lease, mortgage consent fees, survey fees, and sketch plan examination fees.

There is no stamp duty payable on a Lease.

If you have any questions or would like to speak with one of our Solicitors, please contact us.