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The effects of mixed-use developments on leasing

Posted by Andrew Grima on 4 Dec 2019

Assisted by Jason Vo

As you drive across our changing suburbs and cities across Australia, in recent years, you will have noticed an increase in mixed-use developments. By mixed-use developments, we are typically talking about a complex that has a strip of retail shops on the ground floor, and high-rise residential apartments above. However, leasing a mixed-use space raises a multitude of leasing issues.

The Significance of Strata Searches

It is also typical for a mixed-use development to be in strata development. I’m sure we can all appreciate the importance of a building being structurally sound, and free of major defects and safety issues in the wake of the Opal Towers scandal, particularly if you’ve read my colleague Nick Kallipolitis’ informative article, it is for this reason that I strongly recommend all of my tenant clients to carry out a strata search and obtain a report, prior to signing any lease in a strata development. The strata search will provide key pieces of information such as building expenses (usually the search will provide information for a few years and often you can track the increases and find any outliers); planned works to the building and any structural defects and safety issues.

The issue of too much Common Property 

Common property (being those areas of a building shared and accessed by all occupants), can raise issues – particularly for commercial tenants. For example, the commercial tenants in the building may require access and usage rights over common areas for signage, car parking, infrastructure (e.g. power and gas) and communications equipment. If the building is part of a strata title, these usage rights cannot be attained without the other owners’ corporation approval. This approval process may be costly and usually takes time – particularly if a by-law may be needed to lock in such rights.

Understanding By-laws

By-laws are the building rules that all owners and occupants have to abide by. Generally, they are bespoke, although some residential strata schemes will use the model by-laws provided in the Strata Schemes Management Regulation (NSW) 2016. I always advise my tenant clients to make sure they read and understand all of the by-laws, and keep a copy, which can be obtained from a strata search. This is because some tenants find that the by-laws are too onerous for the operation of their business (e.g. hours of operation, noise controls, etc). I particularly recommend my clients to check if the by-laws mention that any specific works or signage rights have to be approved by the owners, or if there are any restrictions around use. 

Sinking Fund & Capital Costs 

Under section 25 of the Retail Leases Act, a lease may also provide for the establishment of a sinking fund to fund major items of repair or maintenance. However, the contribution to sinking funds is limited to only major items of repair or maintenance under section 25A. In the context of a leased strata lot, the Landlord of a strata unit may require the tenant to contribute to levies payable by the owner. This is because all strata schemes require all owners to pay levies that contribute to the strata scheme’s administrative fund and capital works fund in proportion to the unit entitlement of each lot. However, with retail leases, capital costs are not recoverable from the lessee under section 23 of the Retail Leases Act.  Generally, when negotiating leases, I recommend deleting any reference to the sinking fund or special levies.

Key Takeaways

I highly recommend all prospective tenants of mixed-use developments to:

• Undertake a strata search;

• Ensure that they thoroughly understand the by-laws of the building; and,

• Appropriately negotiate costs that the tenant has to contribute to, if at all.

Despite these issues, an appropriate mix of the location and business type can mean that leasing in a mixed-use space can be a viable option for establishing or expanding a business, as there is a ready-made customer base in available in the building.

If you would like assistance with entering a lease for a lot in a mixed-use space, or with negotiating any provisions around costs, please do not hesitate to get in touch with Coleman Greig’s Commercial Property team.

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