Commercial Property Blog

Legal Tips and Traps

An each way bet on permitted use

Posted by Andrew Grima on 30 Nov 2017

On Melbourne Cup day I made an unsuccessful bet each way on a horse - for a place and a win.  
 
It occurred to me afterwards that the more I look at 'permitted use' descriptions (ie. how the tenant will use the premises during the term of the lease), the more I feel that you can’t have a bet each way.  
 
In the more than 20 years that I have been in practice, it has often been argued by both landlord and tenant alike that you should drill down in your permitted use description, making it as specific as possible. Landlords like specific permitted use descriptions so they can then have flexibility to grant leases to other tenants where they might have non-competing or exclusivity provisions in their leases. Similarly, tenants like to have specific permitted use description so there is no doubt as to what they can or cannot do in their premises.
 
If you’re a tenant you really need to have a good think about this strategy. The more specific that your permitted use description is, the harder it is to introduce new product lines. I see this all the time when a food and beverage client is leasing in a shopping centre and they want to introduce a variation to their menu or where my client has a specific manufacturing processes that they want changed. I often recommend to my clients to keep the permitted use description more general unless they are sure about the specific activities they wish to perform or product they want to sell or trade from the premises.
 
Another issue which many people overlook is the impact of a specific permitted use description in the context of a market review. One of the criteria for a market is not only comparable premises but, comparable usage. If the permitted use description is quite specific, and there are no comparable premises with that same permitted use, it’s quite easy for a tenant to argue to the landlord that they have no basis upon which the market rent (usually higher) can be based. Therefore, as a landlord you may also be doing yourself a grave disservice in insisting on or agreeing to a specific permitted use description. Inadvertently, you may be sowing the seeds for a very difficult market review calculation and possible argument down the track.
 
So it is clear from what I said above that you can’t have it both ways. The gains you may have in a specific permitted use description may be wiped out quite easily.

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