In brief - Consider the contract structure, fit out costs and terms of your lease

As businesses change, so do their requirements for office space or shop space. This is a brief overview of some of the issues you should consider when planning a new fit out.

The structure of the fit out contract

One of the most important steps when planning a fit out is to consider the contract structure. For example, you need to decide whether you want to enter into one contract with a firm that will design and construct your fit out, or whether you want to enter into multiple contracts with multiple companies that each play a specific part such as designing, managing or constructing the fit out. Regardless of which approach you choose, it is always best to get legal advice at an early stage.

Who pays for the fit out?

If you own the premises that you are fitting out, the answer is quite simple - you pay.

If you lease the premises that require the fit out, you may be able to negotiate for the landlord to contribute to the cost of the fit out. Do not forget that if your negotiations are successful, you should include a clause in your lease about the landlord's contribution, because it is easier to enforce it if it is in writing.

The Retail Leases Act

The Retail Leases Act 1994 governs most shop leases where premises are used for retail purposes and the lettable area is less than 1,000 square metres. If you carry on a retail business and the lettable area is less than 1,000 square metres, it is easy to work out whether your lease is a lease under the Act simply by looking at your lease or by referring to Schedule 1 of the Act for a list of businesses covered by the Act.

If your business is not a retail business, or the lettable area is more than 1,000 square metres, then the Act does not apply to your business. If this is the case then your lease is governed by the Conveyancing Act 1919, which is silent on the issue of fit out costs, so you will need to consult the terms of your lease.

Landlord's contribution to fit out costs

In situations where a lease specifies that the landlord must contribute to the fit out costs, the Act stipulates that the maximum amount of the landlord's contribution is to be agreed by the parties before the lease is entered into. This means that the landlord is not liable to pay any amount greater than the agreed amount, even if the fit out ends up costing more than estimated.

If you lease premises in a retail shopping centre and the landlord requires a particular standard for the fit out, this information must be contained in a "tenancy fit out statement". The effect of this statement is that you do not need to carry out any work that is not outlined within the statement, but it also means that you cannot carry out any work other than as shown in the statement.

What if you already have a lease?

If you already have a lease but you want to refit the premises, you have two options.

Under the Act you are entitled to refit the premises, subject to the provision of at least two months' notice in writing of the proposed alterations to the landlord. Alternatively, you can wait until it is time to exercise your option to renew the term of the lease.

Option to renew the lease

Many leases contain options to renew the term of the lease. It is important from the perspective of both the landlord and the tenant that these options are carefully drafted, as each party should be fully aware of its rights prior to exercising the option.

The majority of option to renew clauses specifically stipulate, among other things, that the landlord will not contribute to the cost of refitting the premises. You should double check whether your option to renew contains a similar stipulation, as it may influence your decision about whether or not you want to exercise the option.

In a recent Supreme Court case, Miwa Pty Ltd v Siantan Properties Pte Ltd, a landlord attempted to avoid paying $45,000 towards his tenant's refitting on the basis that the option to renew clause was incorrectly drafted.

In a controversial decision, the Court of Appeal rejected that argument and instead found that the landlord was required to contribute to the refitting as stipulated in the option to renew clause contained within the lease.

This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2024.

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