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Tread carefully when leasing in mixed use developments...

Bronwen Gora // Leasing // 29th Jan 2020

Searching for a fresh location this year? Be prepared for mixed use developments figuring more prominently among commercial spaces for lease – as they bring with them a whole new set of issues to consider before choosing to become a new tenant. At their simplest, mixed use developments are those with retail and/or other commercial premises at street level and apartments above. The grandest can comprise self-contained vertical villages, often built above or near major train stations and other transport hubs, with several levels of retail and commercial spaces below any number of residential units. Some offer a hotel or serviced suites. Virtually all major developers including Mirvac, Stockland and AMP plus numerous smaller players have entered the mixed-use market driven largely by increased urbanisation, land shortages and the promise of higher returns than standard CBD projects. In Sydney’s St Leonards for instance, the 88 by JQZ mixed use development taking shape is billed as “bringing CBD style to the North Shore for the first time”. The lavish $1.6 billion project, due for completion in 2023, is anchored by three skyscrapers offering luxury five-bedroom apartments with private lifts and a rooftop pool. Some 30,000 square metres of commercial and retail space will see the ground levels teeming with shops, restaurants and a major library, all a short stroll from the main railway line serving Sydney’s North Shore and beyond. In Victoria, key among major emerging mixed use sites is Geelong Quarter by Franze Developments. As the largest mixed-use project on the Bellarine Peninsula it will become a gateway location for the region’s first new hotel in almost 20 years (the $75 million, 180-room Holiday Inn & Suites), 14 luxury residential apartments, 1000 square metres of retail and 7400 square metres of designer office space. Small, medium or large, the most obvious benefit to a business located within mixed-use complexes is having potential customers and clients literally on the doorstep. As tempting as this appears, Coleman Greig principal lawyer Andrew Grima has seen many business owners new to mixed use developments committing themselves to leases only to discover a whole new world of unanticipated hurdles. Four areas currently creating most dilemmas for tenants unfamiliar with mixed use properties are, according to Mr Grima: strata, common property, by-laws plus sinking funds and capital costs. “These styles of developments are undoubtedly viable options especially for newly established businesses and those wanting to expand as they can benefit from these highly trafficked areas,” Mr Grima said. But increasingly, tenants are seeking advice in relation to these factors well after the lease has been signed – simply due to a lack of awareness of the potential pitfalls. Here are a few hard and fast rules to avoid ending up in the same boat: 1 Strata searches = imperative “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,” Mr Grima said. For this very reason he says he cannot urge prospective tenants strongly enough to undertake their own strata searches and find out what lies beneath a glossy façade well before signing contracts. What are the building’s expenses, and do they appear to be increasing? Are there planned works to the building? Are there any structural defects or safety issues that could pose a risk to you, your employees and clients? 2 Common property: find out who has dibs on what and who pays Shared access areas can be problematic for commercial tenants, as usage rights need to be cleared by the owner’s corporation, and business owners tend to require the use of common areas for signage, car parking, and share power and gas infrastructure. “If the building is part of a strata title, these usage rights cannot be attained without the other owners' corporation approval,” Mr Grima said. “This approval process may be costly and usually takes time – particularly if a by-law may be needed to lock in such rights.” In 2016, the inflexibility of the ACT’s strata legislation was blamed for a major supermarket liquor chain pulling out of a significant lease at a new, upscale mixed-use development on the Lake Burley Griffin foreshore. The problem arose as the legislation lumped residents as well as businesses into the same body corporate, subject to the same fees and rules for facilities like pools and lifts regardless of whether they used them or not. After much criticism and debate the ACT eventually rolled out a strata reform package last August 3 Understand the building’s by-laws All owners and occupants are required to follow a building’s rules, known as by-laws. “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,” Mr Grima said. “This is because some tenants find that the by-laws are too onerous for the operation of their business – for example the hours of operation or noise restrictions might not work for them. 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.”

4 Sinking Funds & Capital Costs

There is good reason Mr Grima recommends his clients delete any reference to sinking funds or special levies: “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,” Mr Grima explained. “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 when it comes to retail leases, capital costs are not recoverable from the lessee under section 23 of the Retail Leases Act.”

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