If you have thought about leasing part of your commercial, industrial or agricultural land to increase the returns on your investment, there are a few hidden pitfalls of which you should be aware.
When you lease part of existing commercial, industrial or agricultural land, and that lease is for more than 10 years (including any option periods), that lease is deemed a subdivision of your land and there is a legislative requirement for you to obtain subdivisional approval from the local Council. This can be very costly in both time and money.
On a positive note, this does not apply to all leases that are over 10 years, it only to those leases that are leases for part of the land. If a lease of any length is of a building on your land and the whole of the leased premises are contained within that building, subdivisional approval will not be required. If there are open areas such as outdoor dining areas, storage areas, access ways/ drive-thru’s etc and they are included as leased areas, there will be a requirement for you to obtain subdivisional approval from the Council. If you are intending the tenant to have the use of such areas as part of the lease, it may be more appropriate to licence the use and occupation of those areas to the tenant rather than leasing them.
In order to try and get around the requirement to subdivisional approval from Council, landlords have in the past registered a number of consecutive leases of 10 years or less over part of the land to stay under the ‘10 year’ threshold. For example, if a landlord and tenant agreed on a 20-year lease for part of the land (which, even if it was a 10-year lease with a 10 year option would require subdivisional approval) the landlord and tenant would enter into and register a 10 year lease and then enter into and register another 10 year lease simultaneously. The commencement date of the second 10-year lease will start when the first lease ends. Although this may have worked in the past, current case law suggests that consecutive leases are considered one lease and therefore, subdivisional approval would be required. The Victorian Supreme Court in Equuscorp Pty Ltd v Belperio  VSC 14 considered that a series of consecutive leases (totalling 25 years) over a pine plantation in New South Wales required subdivisional approval. This decision was upheld on appeal in Equuscorp Pty Ltd & Anor v Antonopoulos  VSCA 179. The leases were also deemed void for illegality.
Before you agree to lease part of your land to prospective tenant on a long-term basis, make sure you give some thought to the potential pitfalls associated with long term leases and the impact they can have on both you and the tenant. If you are concerned whether a lease you have entered into or are about to enter into is deemed a subdivision of land, please check with us.
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NOTE: This article is for general information only and should not be relied upon without first seeking advice from one of our specialist solicitors.