Commercial / Short-term Retail Shop* [incl. within Retail Shopping Centres] -> Licence to Occupy

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An alternative solution to Empty Buildings/Retail Shopping Centres

A "Licence to Occupy" is a way to increase utilisation and drive engagement with the growing oversupply of empty/vacant retail shops/shopping centres/offices across Australia.

This problem has been mainly caused by the COVID-19 pandemic's impact on "brick and mortar" businesses.

Have you ever seen or entered a "Pop-up" Shop?

If so, the "Pop-up" Shop arrangement will most likely have been documented using a "Licence to Occupy".

These short-term arrangements can be beneficial to:

➲ test a business idea;

➲ take advantage of a seasonal increase in demand; or

➲ sell an excess of stock which needs a temporary storefront.

In some cases, if it works extraordinarily well, a longer-term lease can result.

Renewing Cities

For examples of how 'Licences to Occupy" have assisted in the past (originating in Newcastle, NSW) please read the book by Marcus WestburyCreating Cities” or to simply gain an overview please watch his 2011 TEDx talk.

We have also started a new “Pop-up” Shop ➲ Smart List which will be updated over time with curated inks on this important topic.

Short-term Retail Shop* [incl. within Shopping Centres] ➲ Licence to Occupy

* Whether the Short-term Retail Shop ➲ Licence to Occupy is deemed a Retail Shop Lease by your local State or Territory legislation will depend on factors such as the following:

1️⃣ The length of the licence (including an options to renew or extend); and/or

2️⃣ The length of time the licensee has already occupied the premises prior to the commencement of the Licence to Occupy.

Quick Overview of Australian Retail Shop Lease legislation^:

In ACT + NSW the relevant Retail Shop Lease legislation does not apply* ➲ if the term is for less than 6 months (with no option to renew or extend) and the premises were vacant prior to the Licence to Occupy.

SA ➲ Retail Shop Lease legislation does not apply if the term is for 1 month or less.

VIC ➲ Retail Shop Lease legislation does not apply if both the term (including any option to renew or extend) and the period of continuous possession are for 1 year or less.

TAS, WANo exemption.

* In Qld + NT the relevant legislation only partially applies.

^ Note: The above provides a general overview and is no substitute for legal advice.

We recommend you obtain our legal assistance to ensure a Licence to Occupy will be valid in your jurisdiction and specific circumstances.

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What is the difference between a Lease v. A Licence to Occupy?

Lease v. Licence to Occupy

Commercial Distinctions

A lease is quite often a significant obligation on the part of businesses. It is both a financial commitment, and a time commitment.

Traditionally, the majority of the time, a business would look for security of tenure, and a landlord for a long-term tenant.

The lease was an appropriate arrangement suiting the needs of both parties equally.

However, an insistence on occupancy by way of a lease on the part of landlord prevents businesses from engaging in more experimental ventures.

With smaller or newer businesses particularly, risks cannot be taken with their business model when they have rent to pay for the coming fortnight; and so rental obligations may push them into a certain conservatism with their business, a reluctance to try different things and be different, for fear of insolvency.

Such risks are often mitigated with a Licence to Occupy affords an occupant many of the same rights as a lessee or tenant under a Lease, though usually for the short-term.

There are other legal distinctions between a lease and a licence, a summary of which can be found below, though the primary difference of interest in a commercial sense is the greater scope of risk-taking a business may undertake with a licence to occupy.

Legal Distinctions

Summary of the Legal Distinctions between a Licence to Occupy v. Leases

For a more detailed discussion of the commercial and legal differences between these two types of property law agreements please refer to our blog article “Licences to Occupy - A viable Alternative to Leases?" by Suk Jae Chung | Virtual Intern at Blue Ocean Law Group℠.

Important Notice:

This FAQ is intended for general interest + information only.

It is not legal advice, nor should it be relied upon or used as such.

We recommend you always consult a lawyer for legal advice specifically tailored to your needs & circumstances.

Is a Licence to Occupy a "Lease" for the purposes of AASB 16 Leases? Can it stay off-balance sheet?

The answer to this FAQ will ultimately be a question for your Accountant

Before you brainstorm the bricks n' mortar portion of your business plan, we strongly recommend you read + consider this FAQ to learn how adopting a more nimble business model which includes the use of a short-term Licence to Occupy (might be used to provide your business with a strategic advantage).

Other business benefits could also accrue, such as the opportunity to combine multiple + adaptive physical store presence with online eCommerce sales.

Why is this important?

If an agreement does not meet the definition of a "Lease" under AASB 16 Leases, then it is not accounted for on-balance sheet.

Why is this especially important for Commercial + Retail Property tenants?

The following observations have been extracted (emphasis added) from the PWC report entitled: Why the new standard matters to the Retail and consumer industry

The retail industry is likely to be one of the most affected by the new standard, given the significant use of rented premises for their stores. The PwC Global Lease Capitalisation study indicated that there would be a median debt increase of 98% for retailers, and 41% median increase in EBITDA.
Most of such leases are in the form of medium term leases (generally 3-5/9 years),whether in premium locations (flagship stores), shopping centres or ordinary outlets …
Historically such leases have been considered as operating leases, and have not therefore had any impact on the balance sheet.
The amount recorded in the income statement was typically on a straight line basis and entirely included in operating expenses. The new lease standard will not only have an impact on the balance sheet, but also on the operating costs, with a split of the expense between operating and finance costs.
The exemption for short-term leases and small assets is unlikely to provide any significant relief to retailers.

A Licence to Occupy is prima facie caught by the definition of "Lease" under AASB 16?

Under AASB 16, a "Lease" is defined as an agreement, or part of an agreement, that conveys the right to control the use of an identified asset.

The definition does not refer to an agreement labelled as a Lease.

Agreements not labelled as a Lease may meet the definition of a lease under AASB 16; conversely, an agreement labelled as a Lease may not meet the accounting definition of a Lease.

In assessing whether an arrangement is, or contains, a Lease, 3 key assessments need to be made.
These are presented diagrammatically below …
Source: AASB 16 Leases - A Guide published by HLB Mann Judd

Where the lawyer's role becomes clear The exemption for short-term leases!

In the majority of cases, the use of a Licence to Occupy (typically being a short-term arrangement) will qualify for the short-term lease exemption, meaning that it represents an alternative method to circumvent the application of AASB 16 which means that such arrangements can potentially (subject to confirmation from your accountant!) remain off-balance sheet.

The use of a Licence to Occupy is therefore an increasingly important proactive strategic legal tool to consider when your business plans for the control or use of any property.

The technical details of the exemption

The following summary (in technical speak) has been extracted (emphasis added) from the KPMG article AASB 16 Check: Short-term and low value exemptions

The low value and short-term lease exemptions are available to lessees (tenants) only.
*A short-term lease is a lease that, at the commencement date, has a lease term of 12 months or less.
A lease that contains a purchase option is not a short-term lease.
The election for short-term leases shall be made by class of underlying asset to which the right of use relates [AASB 16: 8].
***The following lease expenses are not required to be disclosed:
Expenses relating to leases with a term of one month or less; and
Expenses relating to leases which are both low-value and short-term [AASB 16:53(c-d)].

Accounting Humour

I stumbled upon the following quote in conducting research for this FAQ and thought it worthy of further dissemination.

Extracted (emphasis added) from the article by David H. from the Queensland Audit Office: Do you have any ‘lease agreements’ that are not leases, or any hidden leases?

When discussing leases, it is useful to refer to the quote by Sir David Tweedie, the then Chairman of the International Accounting Standards Board (IASB) on April 25, 2008 when he said:
"One of my great ambitions before I die is to fly in an aircraft that is on an airline’s balance sheet."

Credits:

This FAQ was written by James D. Ford GAICD | Principal Solicitor, Blue Ocean Law Group℠.

Important Notice:

This FAQ is intended for general interest + information only.

It is not legal advice, nor should it be relied upon or used as such.

We recommend you always consult a lawyer for legal advice specifically tailored to your needs & circumstances.

What is a Force Majeure clause?

What is a Force Majeure clause?

A force majeure clause is a method of allocating the risk of a disruptive event. It is a broad catch-all provision whereby the parties list categories or specific instances of otherwise frustrating events, together with the party or parties to bear the risk of the event occurring.

The clause can also grant options to vary, suspend or terminate the contract to one or more of the parties. [1]

Force majeure clauses form part of a contract’s express terms, subject to the conventional methods of construction.

Absent a force majeure clause, it is unlikely a contract’s commercial purpose would suggest that such a provision is so apparent that it goes without saying [2], meaning a court is likely to refuse to imply it.

Further Reading:

For a more detailed discussion please refer to our blog article “Force Majeure Clauses & Frustration: Why the COVID-19 Pandemic is a Wake-Up Call" by Shakvaan Wijetunga | Virtual Intern at Blue Ocean Law Group℠.

Footnotes:

[1] Eg., Yara Nipro P/L v Interfert Australia P/L [2010] QCA 128, [26].

[2] BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266, 283.

Important Notice:

This FAQ is intended for general interest + information only.

It is not legal advice, nor should it be relied upon or used as such.

We recommend you always consult a lawyer for legal advice specifically tailored to your needs & circumstances.