Whilst the landscape of local government leasing can differ between Councils, there are in fact a number of similarities and underlying principles that apply in Queensland, regardless of the location.
Why is Leasing Important for Councils?
Put simply, it means increased revenue for Council that maximises the use and ongoing maintenance of Council owned or controlled facilities.
Councils are continuously being called upon to do more with less and therefore, it’s important for Councils to look at ways of creating their own source revenue. One of the best ways to do this, is through the commercial management of Council land through leasing or other licensing arrangements.
Council as Landlord
If you are responsible for your Council’s leasing portfolio, you’ll probably already be familiar with the term “tenure”. Tenure is the way of identifying who has the right to use and occupy the land based on the ownership of the land.
The tenure of the land will inform Council’s role as Landlord, which can differ depending on whether the land is identified as freehold land or trust land (either as a Reserve or Deed of Grant in Trust), the intended use of the land and the applicable legislation. There is a wide range of legislation that governs how particular tenures are dealt with and how particular rights and obligations of Council as the Landlord can be discharged, including the Land Act 1994, Aboriginal Land Act 1991, Torres Strait Islander Land Act 1991, Property Law Act 1974, Land Title Act 1994, Retail Shop Leases Act 1994 and the Residential Tenancies and Rooming Accommodation Act 2008.
What type of agreement to use?
A question we are often asked is, what is the difference between a Lease and a Licence Agreement?
A Lease essentially has two defining characteristics:
- It provides the Lessee with exclusive possession, to exclude others from the premises including Council; and
- Is for a Term of a certain duration, usually for a lengthier period.
A Licence Agreement on the other hand, is a considered to be a consent to occupy the land, generally without the grant of exclusive possession, and does not give the certainty of Term that a Lease does, with the parties often able to terminate the agreement on short notice (eg. 1 – 3 months).
Determining the most appropriate agreement will depend on the intended use of the land, the prospective Lessee and the location of the premises. If it is a community organisation, reliant on government funding and wanting to use a Council facility, then often a Licence Agreement is more appropriate. Generally, if it is a retail shop (i.e. used for the sale of goods or services) or premises located within a retail shopping centre, a Lease will be required under the Retail Shop Leases Act 1994 (“RSLA”).
Retail Shop Leases
The RSLA imposes specific requirements that can impact Council’s usual commercial terms as Landlord. Some of these requirements include:
- No recovery of Costs – as Lessor, Council is unable to charge the Lessee for its legal and other expenses associated with preparing, renewing or extending the lease (note survey fees and registration costs can still be recovered).
- No rachet clauses – a “rachet clause” is usually used in a lease to prevent rent from decreasing, either following a CPI review or market rent review. Rachet clauses are not permitted in a retail shop lease.
- Annual Outgoings estimate – if the lease provides for the recovery of outgoings, Council must provide the Lessee with an annual estimate of its outgoings for each year of the term.
- Lessor’s Disclosure Notice – Council is required to provide a draft lease and disclosure notice to the Lessee at least 7 days before entering into the lease (i.e.. 7 days before the date of signing the lease, the Lessee takes possession or first pays rent, whichever is the earliest).
- Contracting out is prohibited – any provision of a lease that tries to exclude the RSLA requirements is void.
There are a number of other specific requirements under the RSLA that must be complied with and even if not written into the terms and conditions, will be implied in the retail shop lease. Therefore, it is important for Councils to be aware of the RSLA requirements when preparing a retail shop lease to ensure it complies with the legislation, whilst maximising the protection of Council’s interest.
Tips to avoid the Traps
There are some common traps that Councils fall into when it comes to leasing Council facilities. Below we provide a few traps with some tips to assist in avoiding these where possible:
- Continuing with historical, unfavourable arrangements – don’t be afraid to review and update terms and conditions as old agreements expire. Commencing rent and rent reviews are always important, so insist on commercial rental and avoid locking Council into lengthy term agreements wherever possible.
- Peppercorn Leases – with the availability of funding and grant opportunities for local organisations, there may not necessarily be a need to provide community groups with leases where rent is $1 if demanded. If Council feels it’s necessary in the circumstances, ensure there are strong repair and maintenance clauses placed on the Lessee to ensure value for the arrangement is maintained.
- Occupation before signing – allowing a Lessee to move in before a written agreement is signed by the parties can weaken any negotiating advantage, and removal of the Lessee in circumstances where a written agreement is not finalised can be costly and difficult. Therefore, avoid allowing the Lessee to move in before the terms and conditions are finalised, and the agreement executed by both parties.
- Minimal repair and maintenance requirements – strong repair and maintenance clauses within a Lease ensures that Council revenue is not spent on maintenance of premises that should be the responsibility of the Lessee. Some particular land uses – for example, swimming pools or particular sporting facilities – will often require carefully drafted, specific repair and maintenance clauses that respond specifically to the nature of the use.
- Not managing difficult Lessees – it is important to ensure that if the Lessee fails to comply with their obligations under a lease that Council follows the relevant notice terms of the Lease to have the Lessee remedy the breach.
- Consider procurement obligations – a lease of land is a valuable non-current asset contract under the Local Government Regulation 2012 for which tenders are generally required, unless an exception applies.
Whilst it may seem easier to just renew an existing lease on the same terms or to amend another Lease from different premises, it is likely to result in unfavourable terms continuing into the future. The additional time spent drafting an appropriate agreement that protects Council’s interests as much as possible should be seen as short-term pain for long-term gain.
Our experienced local government team can assist with any queries about leasing of Council facilities or any other legal matter you have. For further information, please contact our team on 4052 0736 or mdunstan@prestonlaw.com.au.