Leasing out real property can be an attractive value proposition for charitable and not-for-profit entities. Such arrangements can be a useful method of maximising the value of a charity’s assets and generating additional finances for the charity to use in pursuing its charitable purposes and objectives.

Typically, leases of property may be attractive to charitable entities as legal ownership over a leased asset remains vested in the charity – rather than ownership being transferred to the Buyer under a Contract of Sale. Additionally, charitable or not-for-profit entities often enjoy the following benefits from leasing arrangements:

• Steady income generation and diversification of revenue streams – charities who lease their property broaden their revenue sources and increase their capacities to pursue charitable purposes through additional rental income. This is especially useful in situations where charities seek to derive benefit out of land which is idle or unused.
• Taxation minimisation – where a property is used for charitable purposes, the property may be eligible to receive specific types of taxation concessions or exemptions (such as state-based land tax exemptions or local council general rates rebates/exemptions). A charity may seek to lease out its property to ensure that property owned by a charity is being used for charitable purposes (which may be necessary for it to qualify for state taxation benefits).
• Certainty of rights and obligations – Charities will often enter into leases to ensure they have certainty over the particular rights, responsibilities and potential liabilities of the parties to the agreement, which is particularly useful in solidifying and documenting tenancies which have previously existed as more informal arrangements (such as those which may occur between parties/entities related to the charity).
• Alignment with charitable purposes – some charities, such as those established to provide housing assistance or affordable housing schemes, might acquire and develop property to lease out at reduced rates to persons experiencing hardship or disadvantage. Accordingly, entering into leases may form part of the charity’s charitable mission.

What should a charity consider before leasing its property?

A decision by a charity or not-for-profit entity as to whether to lease out its property should never be made rashly or hastily – there are a multitude of factors which should carefully considered before entering into such a lease. Generally, laws governing leases of property differ across different States and Territories, but some general considerations to which a charity or not-for-profit entity should turn its mind include:

• Lessee – who is the lessee in relation to the Charity? If the proposed lessee is a related party to the charity, then you should seek legal advice to ensure that you are not breaching your charitable purpose and that the lease is at market rates (or rates more beneficial to the charity).

• Term – when will the lease commence? When will the lease expire? Will there be any options for the Tenant to extend the term? Charities should be very careful in ensuring that the term for which property will be leased out is reasonable, and that the term’s length does not bring about any unintended consequences (for example, Queensland’s deemed subdivision laws for leases over a part of a parcel of land where the lease extends for a term beyond 10 years).

• Type and Description of Property – is the lease for residential property, commercial property or for personal property? If commercial, will the lease be for a retail shop, or will it be for some other kind of commercial space? Is the lease for the whole or part of the property, and in what state or territory is the property located, Specificity in the description of leased property is essential, and depending on the nature of the property being leased the lease agreement may be governed by different rules and laws.

• Rent and Outgoings – how much rent will the Tenant pay, and how will this be calculated? Will usage costs for critical services such as water, electricity and air-conditioning be included in the rent, or will the Tenant pay for these separately? Typically, charities should ensure that the rent and outgoings amounts are set high enough to cover its costs for maintaining the property (plus some), but not so high as to be uncommercial. This is especially important for charities registered with the Australian Charities and Not-for-profits Commission (“ACNC”), given requirements of Directors of registered charities to act in the best interests of the charity. This means that generally any lease terms should be on market terms or on terms more favourable to the charity. Consider taking specialised financial advice on these aspects.

• Rent Review – How will the rent increase in each year – will it be annual increases in accordance with CPI? Will it be fixed percentage increases every period of time? Charities should ensure that rental increases maintain the value of the rent and keep up with the rising costs of living. A charity should seek financial advice to determine an appropriate figure.

• Permitted Use – for what purposes is the Tenant intending to use the premises? Can the property be lawfully used for that purpose? Does the charity wish to restrict the Tenant’s use of the property for particular purposes? For leases of commercial land, also consider whether the Tenant is to receive Exclusive Use – i.e. will the Charity guarantee to the Tenant that it will not lease another part of the property to a business similar in nature to the Tenant’s.

• Privacy – if a charity leases its property, the Tenant will often require quiet enjoyment of the property free from unreasonable interference from the Lessor. How much will these privacy conditions impact upon the charity’s operations if the charity cannot access/use the property?

• Retail Shop Leases – are the premises caught by your state’s respective retail shop lease legislation? If so, there are implications for the form of the lease and the disclosures you must make to the lessee. You should seek legal advice to determine whether these rules apply and how to comply with them.

• Insurances, Maintenance and Damage to Property – who is responsible for rectifying damage to a property and ensuring the property is maintained to an appropriate standard? Who will revert the property to its original condition at the end of the lease? Who bears the costs of taking out insurances over the property? Clarity on the answers to these questions are important to ensure each party understands its rights and obligations under the lease.

• Prior Encumbrances – are there any encumbrances (such as mortgages, security interests or caveats) on the property title which may act as a barrier to the charity leasing out its property? These may need to be resolved prior to a lease agreement being signed.

• Implication for State Land Tax exemptions – If you are currently recipient of state land tax exemptions as a charity, then you should seek legal advice to ensure that the proposed lease does not jeopardise any ongoing entitlement to such an exemption.

• Termination Rights – In what circumstances does the charity wish to be able to terminate the lease with the Tenant? Are there any actions of the Tenant which would justify immediate termination by the charity? Are these terms fair and reasonable?

• Security – How will the charity ensure that the obligations of the Tenant will be fulfilled? Will a bank guarantee, a security bond, or a personal guarantee be required from the Tenant as collateral?

• Sub-letting and Assignment – will the Tenant be permitted to assign or sublease their rights under the lease to a third party? Must the third party be approved by the charity prior to the Tenant entering into an agreement to sublet/assign.

• NSW Schools and Education Act considerations – Before looking to lease a property owned by a school in NSW, careful consideration will need to be given to compliance with the Education Act and, relevantly, compliance with the section 83C components of the Act.

Before you sign any form of leasing arrangement, it is always prudent (and, in some cases, necessary) to obtain specialised legal advice from a qualified professional. The experienced team at Vocare Law can assist you with preparing a lease agreement that is tailored to suit your charity’s needs. Contact us today on 1300 862 529 or send us your enquiry here. We look forward to meeting with you.

This article was written by Jackson Litzow & Simon Mason.

Difference Between Lease And Licence: Why It Matters

As William Shakespeare pondered centuries ago, “What’s in a name?”

Shakespeare may have been prophetic – in a modern legal context, the name given to a document or agreement may not reflect its true nature. If you have permission to use someone else’s land for a particular purpose, you may have entered into a written agreement with the landowner which sets out the terms and conditions of your occupation. The agreement may be called a licence or licensing agreement suggesting that you have a personal right to enter and use the premises.

However, on closer inspection, your so-called licence could turn out to be a lease giving you an interest in the land itself together with the rights and responsibilities of a tenant.

In these circumstances, the judicial view is that substance takes precedence over terminology with courts examining the true nature of the agreement rather than its language to ascertain the genuine intentions of the parties.

Clarifying the practical difference between a lease and a licence could help you to determine your rights and obligations and avoid costly litigation in the long term.

Lease vs. Licence – the Practical Difference

The key distinction in the difference between a lease and a licence is that a lease affords the tenant or lessee an interest in the leased premises which is manifested in the right to exclusive possession (see the case of Radich v Smith [1959] HCA 45 discussed further down).

Exclusive possession entitles the tenant to remove unwanted visitors (potentially including the landlord) during the term of the Lease.

By contrast, a licensee merely has a licence agreement to occupy the property and has no right to exclude others during the licensee’s period of occupation.

To highlight the difference between a lease and a licence, we have provided a selection of the rights and responsibilities of a tenant under a lease contrasted with those of a mere licensee who does not have the same interest in the land:

Common Law Right to Sue an Intruder in Trespass

Tenant under a lease: As discussed, a lease entitles the tenant to ‘exclusive possession’ of the Premises, which includes the right to expel an unauthorised visitor. This means that the tenant may have an action in trespass against the landlord if s/he enters the land without the tenant’s consent and without authorisation under the terms of the lease.

Licensee under a license: No such right of exclusion is available – the owner / licensor of the land may be free to enter the land at will.

Registration of Lease – Protection Against Competing Interests

Tenant under a lease: A long-term lease (for a term exceeding 3 years) in Queensland must be registered on the title in order to “transfer or create an interest in the lot”. See Section 181 and 182 of the Land Title Act 1994 (Qld). In the Queensland context, registration is optional for short-term leases of 3 years or less. Once registered, it will enjoy the protections of indefeasibility, meaning that the tenant’s interest in the land will take priority over other, unregistered instruments.

Licensee under a license: A licence cannot be registered and therefore it does not vest the licensee with an interest in the land.

Obligation to Pay Rent and to Keep in Repair

Tenant under a lease: Section 105 of the Property Law Act 1974 (PLA) provides that the tenant is obliged to pay the agreed amount of rent and keep the premises in good repair (except in the case of fire, flood or similar event rendering the premises unfit for the purpose). This provision can be excluded or modified by the express words of the lease.

Licensee under a license: The licensee’s repair and maintenance obligations, and the amount of rent payable, will depend upon the terms of the licence.

Breach of the Obligation to Keep the Premises in Good Repair

Tenant under a lease: If the tenant breaches this repair obligation, under Section 112 of the PLA, any damages recovered by the landlord must be proportionate to the resulting decrease in the value of the premises. The landlord cannot forfeit the lease for a failure to repair without complying with the Section 124 notice requirements (see below).

Licensee under a license: The licensee’s repair and maintenance obligations, and the amount of rent payable, will depend upon the terms of the licence.

Repair Obligations Will Depend Upon the Terms of the Licence

Tenant under a lease: Section 107 of the PLA allows the landlord a limited right of entry to view and make repairs to the leased premises (representing an exception to the tenant’s right of exclusive possession). However, this can be excluded by the express terms of the lease.

Licensee under a license: The licencor can generally enter the premises at any time and for any purpose (whether to make repairs, view the premises or otherwise). If the licensing agreement limits the licensor’s capacity to enter the premises, the license may constitute a lease.

Right to Assign or Sublease to a Third Party

Tenant under a lease: Per section 121 of the PLA, the landlord cannot ‘unreasonably’ refuse to consent to the proposed assignment or sublease. This section cannot be excluded by the express provisions of the lease, but will only operate in circumstances where the landlord’s consent is expressly required.

Licensee under a license: The licensee has a mere personal right to use and occupy the property, and is not able to enter into an assignment or sublease unless the express terms of the licence agreement allow it.

Right of Forfeiture / Re-entry

Tenant under a lease: Section 124 of the PLA provides that if the tenant is in breach, the landlord cannot forfeit the lease and retake possession of the premises without first giving the tenant notice of the forfeiture and a reasonable time to rectify the breach or pay any ‘reasonable compensation’ for the damage. (However, this protection is not available for leases / tenancies of 1 year or less.)

Licensee under a license: A licensee enjoys no such protection. In theory, a licence may be terminated at the will of the landowner / licensee even though contractual damages may apply.

Subdivision Approval Requirements Under the Sustainable Planning Act 2009 (Qld)

Tenant under a lease: A lease of part of a lot (that is not part of a building) for a term exceeding 10 years (including options to renew) will constitute a ‘reconfiguration of a lot’ requiring subdivision approval from the local authority.

Licensee under a license: Not so for licences.

Shared Occupancy

Tenant under a lease: A lease affords the tenant an exclusive right of possession and is therefore unsuited to shared use / occupancy.

Licensee under a license: A licence is suitable to shared use (making it appropriate for a number of arrangements our church clients enter into).

Case Law: Radich v Smith – Lease or Licence?

In the case of Radich v Smith [1959] HCA 45 (“Radich’s case”), a small business owner, Maria Radich, entered into a deed of agreement to operate her milk bar out of a lock-up shop in Sydney’s Mossman area.

Under the terms of the agreement, Ms Radich was granted the “sole and exclusive license and privilege to supply refreshment to the public…and to carry on the business of a milk bar.”

However, despite the use of the term licence, the High Court ultimately found that Ms Radich had been granted a lease of the premises for the agreed period.

Justice Windeyer held that, “I imagine all concerned would have been astounded if they had been told that the appellant [Ms Radich] had no right to exclude persons”, especially given that the premises was a lock-up shop and therefore not readily accessible to others outside Ms Radich’s business hours.

His Honour further noted that it would be equally astonishing if the owners of the shop were able to “licence other people to carry on any activity there” provided only that this did not interfere with Ms Radich’s business operations.

Clearly, Ms Radich was implicitly entitled to remove unwanted visitors and to conduct her milk bar business without unauthorised entry or interference. This gave her a right to ‘exclusive possession’ of the premises for the term of her occupation, an arrangement more consistent with a leasehold interest. She was therefore entitled to have her rent determined by the Fair Rents Boards (one of the protections afforded to tenants in New South Wales at that time).

Determining the Parties’ Intentions

Justice Windeyer noted that the difference “between a lease and a licence” is ultimately “a question of intention.”

But, His Honour proceeded to say:

Intention to do what? Not to give the transaction one label or another. Not to escape the legal consequences of one relationship by professing that it is another. Whether the transaction creates a lease or a licence…depends upon the nature of the right which the parties intend the person entering upon the land shall have in relation that land.

His Honour therefore acknowledged that language has the potential to mislead – certain terms may be adopted, sometimes unconsciously, sometimes with the deliberate intention of concealing the true nature of the parties’ agreement and evading the attendant legal ramifications.

Therefore, even if your agreement is called a lease (or a licence), this is not necessary conclusive. It is essential to consider the entire agreement (not just isolated terms) in order to determine the rights and interests the parties intended to create.