The “permitted use” section in a lease describes how a tenant is allowed to use the premises during the lease term.
The permitted use is often located in the ‘Schedule’ or ‘Particulars’ of the lease (usually at the back or front of the document) and is tied to provisions within the lease’s general terms. Those provisions usually attempt to:
- protect the tenant’s rights to use the premises for that permitted use; and
- restrict the tenant from using the property in any way which is not specified in the permitted use.
Often in the excitement of procuring new business premises, little consideration is given by a tenant to whether a permitted use (as stipulated in a lease) properly permits the tenant to carry out the precise business activity which they have planned. This may be because the previous tenant did something similar, the appearance of the space seems quite suitable or perhaps because the landlord or agent has given some verbal assurances that such a use will be acceptable and legal.
Landlords can also neglect to carefully consider a permitted use that a tenant has requested -either because they are eager to sign-up a new tenant or perhaps because they believe the landlord will bear no responsibility for the tenant’s choice of use.
However, in negotiating a commercial lease, it is important for both landlords and tenants to ensure that the permitted use is accurately described (and properly investigated) prior to entering into the lease in order to avoid later complications or disputes.
Tips for tenants
Tenants should, among other things, consider the following:
- Does the agreed permitted use allow you to conduct your principal activity as well as any ancillary or future activities? For example, if a tenant opened a rock climbing venue and wanted to later add a dine in café area, such use may be restricted by local planning laws (or be contrary to the landlord’s wishes).
- Is the permitted use stipulated in the proposed lease so narrow and restrictive that it might make it difficult for you to later assign the lease or sell the business? For example, if in the future you need to close or sell the business, a broader permitted use may make the prospect more attractive to an incoming purchaser or new tenant.
- Are you legally allowed to use the premises in the way described in the permitted use? Often with new and innovative businesses, certain activities will require special permits or zoning. Properly investigating whether you can use the premises in a certain way (and having that properly described in the permitted use) can avoid a lot of heartache later if it turns out that your intended use is not legal, prohibitively expensive or the landlord simply disagrees. Understanding whether local laws relating to trading hours, signage, parking and curbside fixtures can be make or break to a new business. So investigating these, describing them correctly in the lease (and having frank discussions with the landlord about desired uses -actual or potential) prior to entering into a lease will be critical.
Tips for landlords
Landlords should keep in mind:
- The importance of not offering any representations or assurances that the permitted use the tenant desires will be possible or legal. A step further might be to incorporate some form of warranty in the lease to be given by the tenant that the tenant has conducted its own investigations as to the suitability of the premises for the permitted use.
- Be cautious of a permitted use which is drafted in terms that are too broad or vague as this may restrict the landlord’s rights to later take action against a tenant for an eventual use of the premises which was not anticipated.
- Consider whether the tenant’s desired permitted use may unintentionally render the premises “retail premises” within the meaning of retail leases legislation. This may impose additional obligations and restrict the landlords rights as against the tenant in circumstances of a dispute.
- Ensure that any works or installations a tenant proposes to undertake for a desired permitted use are pre-approved, performed by qualified tradespersons and that the tenant has obtained all necessary permits prior to commencing.
If you would like advice in relation to formulating the permitted use within a lease or some assistance with negotiating the terms of your commercial lease generally, get in touch for some practical, commercial legal guidance.