Friday, 28 July 2017

Lease Options: How They Work

What is a lease option? And how does it work? Lots of businesses operate from rented premises. Which means the operators of the businesses have signed a lease with the owner of the premises, which is a contract to occupy the premises for a certain period of time (the term) and pay a fee for that privilege (the rent) and also the expenses incurred in occupying and using the premises, like water, electricity and gas charges (the outgoings).

A lease option is how the tenant (the person who is occupying the premises) can choose to extend the  term beyond an initial period. The use of options recognises these things, among others:
  • It may be difficult for a tenant to commit to a very long period of occupation. The economy can change, and customers' tastes can change, and it might not be possible to operate the same business in the same place for a very long time. Having the choice to extend the term for a fixed perod, or give up the lease at the end of the initial term, is a good balance.
  • The costs to the land owner (landlord) of maintaining the business will change over time. Therefore, the landlord will want to periodically review and increase the amounts of rent and outgoings charged to the tenant. The end of the initial term presents a good opportunity to do this, so that any changes in rent and outgoings will apply for the renewal/extension term.
It is common for shop leases in Australia, where I live and work, to have 5-year terms initially, with one or more 5-year or sometimes 3-year optional extension terms. Usually, the tenant does not have an absolute right to extend the term. The tenant must have complied with the lease correctly, up to that point, to "earn" the right to extend. Also, the option must usually be exercised within a certain limited window of time, e.g. no sooner than 6 months before the end of the lease and no later than 3 months before that time. This gives the landlord the opportunity to advertise the premises and get a new tenant lined up, if the current tenant is going to leave, but also to assess the tenant's behaviour over most of the term of the lease, if the tenant wishes to stay.

Having a lease option up your sleeve is also a very valuable asset in the event that the tenant decides to sell its business. Not having a long-term location will usually affect the price of most types of businesses that rely on goodwill, i.e. the support of returning customers. The option mechanism is a very important part of a commercial or industrial lease. If you are thinking about signing a lease, you should study the option clause carefully.

This blog post supplements our earlier post (2016) also on commercial lease options. You may like to read that post also.

[Photo credit: 2011 Newsagent Edinburgh by Ronnie Macdonald, a public domain image courtesy of Wikimedia Commons, used here under a CC BY 2.0 licence. This blog post is not intended as legal advice for any particular person. The author, James Irving of Irving Law, is a commercial and Wills  lawyer practising in Perth and Melbourne, Australia.]

Monday, 6 February 2017

What is "Security" in a Contract?

Photo: Hire Production Equipment Being Used in Qatar
In many contracts, one party uses something - such as a hired car, or hired equipment - for a fee, and is expected to return that equipment to the other party at the end of the agreement.

In this type of contract, the owner of the equipment usually wants to prevent the hirer from damaging or selling the equipment. But what happens if the equipment is damaged while being used, or is sold or maybe stolen by someone else?

In that type of situation, the contract needs to include some kind of security. Security means a facility for the owner to recover its loss from the hirer or even someone else, like a guarantor for the hirer. Common forms of security can include the following things:
  • Bond money.
  • A chattel mortgage of some type, which prevents any third party being able to legally become the owner property without the consent of the first owner.
  • A guarantee given by the hirer as a bank guarantee.
  • A guarantee given by a third party, e.g. a personal guarantee from another person.
If the equipment that is being hired is valuable, it makes sense for the owner to take precautions to protect the value of the property.  Asking for security is an important option available for this purpose.

Note that in common law countries, "fair wear and tear" experienced by the property during normal use is not something that the owner can seek compensation for.  Also, some countries have set up registries for the registration of security over personal (i.e. non-real estate property) alongside the older systems for registering land ownership and ship ownership.

[The author of this blog post, James Irving, is a business lawyer who practises in Perth, Australia. Please visit the Irving Law website for further information. This post is not intended as legal advice for any particular person, and reflects the law of Australia at the time of writing. Photo credit: Hire Production Equipment Rental Agency Qatar 04, by Resolution Hire, a public domain photograph published by Wikimedia Commons and used here under a CC BY-SA 4.0 licence.]

Monday, 25 April 2016

Copyright - An International System

Photo: WIPO Headquarters, Geneva, by Yann, courtesy of Wikimedia Commons.

The basic rule of copyright is that the author of a "work" (such as written text, a painting, a photograph) owns the copyright.  The owner can the transfer ("assign") the copyright to another person, for example the buyer of the work.  It happens every day: you hire a photographer to take your photo, you pay for the photo, you and the photographer agree that you own the photo.

But what if there is a dispute about the ownership of the photo? Or about a party's ability to use it? What if the photographer wants to  use a copy of the photo on their website but you don't like that idea?  Or what if you want to print a copy of the photograph somewhere that the photographer finds embarrassing?

Disputes about copyright are settled by the copyright law that applies to the commercial relationship between the parties, usually the law of the place where the contract was made. This law will supply rules about things like ownership, how ownership is transferred, and whether the author retains any rights after transfer.

What happens when copyrighted works cross borders? What law applies to a movie made in the US is screened in Argentina, for example? Copyright laws are very similar across countries. That is because most countries have signed up to international copyright treaties.  Compliance with those treaties is managed by an international organisation, the WIPO. The WIPO plays an important rule as a forum for the discussion of new developments in Intellectual Property law.

The development of an international system of IP law has underpinned the expansion and internationalisation of popular culture. Movie makers, artists and writers can export their works all over the world, through the internet or otherwise, profitably because they can rely on interconnected copyright laws to protect their rights.  This is why governments take strong action to stamp out piracy and counterfeiting, which undermine the international copyright protection system.

 April 26 is World Intellectual Property Day. It is an opportunity for us to think about this key part of modern culture.

[This blog post is not intended as legal advice for any particular person, but as an informational and educational discussion of topics of general interest.  The author, James Irving, is a commercial lawyer for individuals and small businesses who practises in Perth, Australia.  You are welcome to visit the Irving Law website for further information.]

Wednesday, 6 April 2016

Unfair Contracts

Gesselenbrief Document: public domain photo by Stadarchiv Bludenz, courtesy of Wikimedia Commons
It sometimes happens that two persons make a contract which one of them realises or later decides is unfair. Can the unhappy person break off the contract, or reverse it?

This has always been a difficult issue for the legal system, because the core concept of contract law is that it is a freely made, binding agreement.  If the law allows persons to change their minds, then what contract will be safe from challenge?

But the law does recognise exceptions to the rule that your signature on a contract is the end of the story, and the contract cannot be changed or abandoned after it has been signed.  For example, a signature obtained by fraud does not create a binding contract.

In recent years there have been changes to laws in many countries where the basis for overturning contracts has been expanded.  This change reflects an understanding that, in many situations, an ordinary person is at a significant disadvantage when dealing with large organisations like banks and insurance companies, which rely on complex, standard form contracts without much scope for negotiation.

In Australia, for example, an unfair contracts law was introduced in 2010 as part of a major restructuring of competition and consumer laws: see sections 23-28 of the Australian Consumer Law (ACL).  Under this regime, a court can declare an unfair term in a contract to be void if the following criteria apply:

  • the contract is a consumer contract
  • it is also a standard form contract
  • it has an unfair term
A "consumer contract" was originally defined in a way that excluded commercial agreements. On 1 July 2016, however, the coverage of the law was expanded to include small businesses. See the ASIC announcement regarding this amendment.

A "standard form" contract, as the name suggests, is a document that is prepared in advance in a form not subject to variation, but the ACL doesn't include a definition.  The language used by government bodies is that the document is offered on a "take it or leave it" basis.  In practice, this concept may lead to confusion.  Many standard form documents also have a box where the parties can include extra terms or comments.  Does this stop it from being a standard form contract?  The answer is unclear and the issue must be left to the courts to interpret the law, unless the law is amended. 

(Note: the author conducted a web search at the time of writing this post but wasn't able to locate a case report explaining what a "standard form" contract is, for the purposes of this particular law.)

An "unfair term" is defined by the Australian Consumer Law by the application of three tests:
  • a balance test: does the term create a significant imbalance between the rights and obligations of the business and the consumer?
  • a necessity test: is the term reasonably necessary to protect the interests of the business?
  • a detriment test: would the term cause a detriment to the consumer if it were enforced by the business?
The website of the Australian Competition and Consumer Commission provides more detail about how the unfair contract terms law works.

This blog post is not intended as legal advice for any particular person, but rather as an educational discussion of general issues. The post reflects the law current in Australia at the time of writing.  The author is James Irving, of Irving Law, a Perth lawyer whose practice includes preparing contracts and Wills.

Monday, 29 February 2016


Youth Carrying Bag of Money - photo by Marcus Cyron courtesy of Wikimedia Commons

Trusts are very interesting, from the legal point of view.  Unlike individual persons or companies, they aren't thought of as being a "legal person".  It is the trustee of the trust (which can be a person, or a number of persons acting jointly, or a company) that is the "legal person" who represents the trust.

A major exception to this non-personality idea is that trusts are required to pay taxes on income, just like people and companies, on income that is retained by the trust and not distributed to beneficiaries in each financial year.

A trust is really a relationship between some property (the trust fund), the person who manages and looks after the property (the trustee), and the person(s) for whose benefit the trust has been set up (the beneficiary or beneficiaries).  The rules that govern the relationship are set out in the trust deed.

Setting up trusts can have tax advantages for the people involved.  For example, if a business is owned by a private (Pty Ltd) company, its income after deductions would be taxed at the corporate tax rate. If the business is operated by the trustee on behalf of a trust, however, the income flows into the trust and then flows out again as distributions to its beneficiaries.  Let's say there are four beneficiaries, because the business is operated by two married couples.  This means that the income could be split into four parts and each person would pay income tax on his or her share at the applicable personal tax rate(s), including the tax-free threshold on the first part of that income.

A trust can also be set up under a person's Will. This type of trust is called a testamentary trust.  In the case of a testamentary trust, the beneficiaries are usually people like the Will-maker's spouse and children.

In addition to the trust deed, or in the case of a testamentary trust, the Will, trustees are controlled externally by laws, both common law principles and statutes.  One of these default principles, for example (which applies in Australia) is that if there are multiple trustees, the individuals have to agree unanimously on any decision.  Many of these rules can be modified by the trust deed or testamentary trust Will.  For example, if the trust deed appoints three persons to act jointly as trustees, it could say that if 2 out of 3 trustees agree, they can proceed with an action even if the third trustee disagrees.

Trust deeds are often arranged for clients by non-lawyers, e.g. accountants, or by online service providers, as standard documents. These documents have been drafted by lawyers and normally are adequate for their intended purposes. But, if any variations to the standard document are required, it would be appropriate to engage a lawyer to consider and make those edits.  You can save money up front by using a template, but you could also end up losing money down the road in wasted time and unnecessary disputes if the template has not been adapted correctly to your particular needs.

This blog post reflects the law in Australia at the time of writing.  It is intended only as a general discussion of educational and informational topics, and is not intended as legal advice for any person.  If you would like assistance with an Australian trust deed, please contact the author via the Irving Law website.

Sunday, 14 February 2016

Lease Option Terms

Office building - photo by Pafcool2, courtesy of Wikimedia Commons.

A common feature of commercial and industrial leases is that the leases have OPTION TERMS, meaning that a right given to the tenant (also called the lessee) to extend the term of the lease when the term is getting close to expiry.

As the word "option" suggests, the tenant may extend the term, if the conditions for doing so are met, but is not obliged to do so.

The conditions that apply to the exercise of an option to renew usually include that the tenant must not be in breach of the lease - i.e. it has paid its rent on time, not damaged the property, and has done all of the other things that it is supposed to do. Another condition is that the tenant must during the correct timeframe.

The timing of the option exercise is important because most landlords (also called lessors) don't want to reach the end of the term and discover that the tenant is leaving and then experience a period where the building remains unused, is uncared for, and is not earning rent, while the expenses of keeping the building running continue.

For that reason, most commercial/industrial leases require the tenant to indicate that it wishes to stay in the building before the end of the term is reached.  If the tenant doesn't want to stay, the landlord has an opportunity to begin advertising the premises for lease right away and show it to potential new tenants, with a view to installing the new tenant immediately after the old one leaves.

Accordingly, many leases provide a strict window of time during which the tenant has to exercise the option to renew.  A common solution is to make the window start 6 months before the lease ends, and finish 3 months before the lease ends.

Another common feature of leases is that the rent will probably be reviewed at the commencement of any option term.  Rent review mechanisms were discussed in one of our earlier blog posts.

This blog post deals with the law applicable in Australia at the time of publication. If you are interested in finding out more about commercial leases in Australia, please visit our website. This blog post deals with topics of general educational or informational interest, and is not intended as legal advice for any particular person.

Tuesday, 14 July 2015

Contracts and Dates

Ancient Sumerian Contract
Photo credit: Wikimedia Commons

One of the interesting questions I am sometimes asked is whether it is OK to "backdate" a contract. The answer depends on what we mean by "backdate".

If by "backdating" we mean pretending we made the contract at a past point in time rather than now, then the answer is usually "No". The document would tell a lie about itself and that usually falls within the definition of fraud.

If, however, we mean signing the document with today's date, but operating from a past date, then the answer is usually "Yes". Here's an example: a company hires a new employee, but the boss and employee don't sign the worker's hire agreement until Friday. There is usually no problem signing the contract on Friday but making it operate from Monday, i.e. a date in the past.

I say "usually" because the basic ground rules of contract law can always be modified by specific legislation brought in to control a particular area of activity. Generally speaking, however, people can always agree for a certain set of rules to govern their legal relationship for a specified period of time, including a period that has already commenced.

There is another rule that is relevant here. It is not acceptable to make a contract that covers an exchange of value (called "consideration") that is completely finished.  The rule is usually expressed in the phrase: "Past consideration is no consideration". To return to the example, if the person worked for a week then quit, the employer could not then ask the person to come back to sign an agreement once the employment relationship is completely finished, because the obligations on each side are complete.  If there is a left-over obligation, however, then parties can sign an agreement about that thing.  It is also possible to sign agreements acknowledging certain facts to be the case, or that certain actions have been completed.

[This blog post is not intended as legal advice, but as a general educations/informational discussion of topics of public interest. Please visit our website for more information.]