Permitted Use: Balancing the landlord versus tenant rights

Posted on Sep 3, 2013 by Dean Frith   |   Categories: Commercial & Business Law, Commercial & Retailing Leasing, Franchising

While the “permitted use” clause is often considered one of the most simple and straight-forward in the lease, an incorrect permitted use clause can be detrimental to a landlord and potentially devastating for a tenant, writes lawyer DEAN FRITH.

Every commercial and retail lease has a “permitted use” clause, which dictates what kinds of activities are allowed in the premises.

From the landlord’s perspective, it is important to have boundaries and limitations on what kinds of activities are permitted under the lease, and to consider tenant mixes. For example, in a multi-tenanted office building, it may not be suitable to have an addiction crisis centre situated next to a high-end financial planning group (even though both may arguably come within the description of “office”).

If the permitted use clause is too broad, such as “retail shop”, which would allow any use as long as goods were being sold, a landlord may find itself lacking the required control as to tenant mix and be faced with an unanticipated business which may negatively impact on tenant relationships.

Of course, tenants do not want to be subject to a permitted use clause that is too restrictive. The clause needs to be wide enough to allow the business to adapt and grow in a dynamic business environment.

It is important to note that Courts have often taken a conservative approach to interpretation of permitted use clauses. For example, a permitted use clause which allowed a tenant to operate a “supermarket including all ancillary retail and service office” was not broad enough to allow the tenant to bake its own bread (as this involved manufacturing rather than sale of goods).

The permitted use of premises is also an important consideration in an assignment of a lease. A landlord is typically entitled to refuse consent to an assignment if the new tenant proposes to change the use to one that is non-permitted. Although this sounds favourable for a landlord, consider a permitted use that specifies “retail bakery with the trading name ABC (a franchisee)” – this effectively prohibits an assignment to anyone other than an ABC franchisee.

A permitted use clause will always be a balancing act between the rights of the landlord and those of the tenant.

 

If you need help with a leasing matter, Baker Love Lawyers can assist. Call us on (02) 4951 5766 to arrange an appointment.