Offer to lease
Ordinarily during pre-contractual negotiations for any commercial lease, you may be presented with a document titled “Offer to lease”, a “Term sheet”, “Letter of offer” or “Heads of Agreement” by the Landlord or Sub-Landlord.
Put simply, this is an agreement between the parties (landlord and tenant in these circumstances) to enter into a lease, setting out the intended key terms. Depending on the drafting of the document and the intention of the parties recorded in it, it may be legally binding or not.
Before signing a document like this, you should ensure that you understand your rights and obligations under it. You should also ensure that the terms recorded in it are clear and complete as to key terms agreed (in principle) and that such terms are consistent with any head lease that applies. Once the document is signed, it will be more difficult to negotiate terms in the actual lease that are different to or absent from any offer to lease.
Market rent
Historically, pathology collection centres have attracted rents significantly higher than ‘market rent’ as compared to other commercial uses for the same premises. The Health Insurance Act 1973 (“the HI Act”), however, contains a number of prohibitions (called “prohibited practices”), including with respect to the flow of benefits. In summary:
- Leases with a pathology provider must not include rent that is ‘substantially different’ from market rent. That is, rent being not more than 20% above market value.
- The ‘market value’ of property, goods or services is the amount that a willing purchaser would have had to pay to a vendor who was willing, but not anxious, to sell.
- A benefit (i.e. the rent in this case, or may include outgoings and services), whether actual or a potential benefit, is not permitted in circumstances where it ‘is related to the number, kind or value of requests for pathology services’ or ‘consists of the provision of staff or equipment at premises of the beneficiary for the purpose of providing pathology services’.
The compliance regime under the HI Act includes developing data analytics tools to identify irregularities in rent or referral rates and undertaking targeted compliance activities. Amongst other things, all leases for pathology approved collection centres, must be submitted to the Government and, it is through this process that leases may be flagged for further investigation if the rent does not appear in line with market.
A breach of the HI Act or associated regulations, may result in civil penalties and, in addition, there are criminal offence provisions punishable by imprisonment.
Know the Head Lease
It is surprising just how often we are presented with a lease or sub-lease that is inconsistent with a head lease that applies to the premises.
A ‘head lease’ (which may sometimes simply be referred to as a lease) is ordinarily the primary agreement between a landlord (land owner) and tenant that records the terms of the tenancy for the whole of a building or premises.
A ‘sub-lease’ (confusingly sometimes also referred to as a lease) is essentially an agreement between the head tenant (under a head lease) and a tenant of that tenant. For example, a medical centre tenant on-leasing a room to a pathology provider tenant.
Some important matters that should be considered in any sub-lease to ensure consistency with the head lease, are:
- Permitted Use: Is the permitted use in the sub-lease consistent with or otherwise allowed under the head lease? For example, the head lease may record the permitted use as ‘medical centre’ whereas the sub-lease may record the permitted use as ‘pathology collection centre’. This is inconsistent so is this allowed?
- Term: All too often the initial term in the head lease is not checked and the sub-tenant may be offered a lease term that is longer than the term in the head lease. If there are no options available to the head tenant for further terms under the head lease or an option for a further term is not exercised by a head tenant, the head tenant could be in breach of the head lease for the subleasing activity.
- Consent of landlord: Does the head lease allow a sub-lease by right, or is the consent of the landlord required? It is important to review and seek advice on the terms of the head lease prior to entering into or making any offer to sub-lease.
If this article has prompted you to believe you require legal assistance with a lease our experience commercial and healthcare lawyers can help you. Contact us today on +61 3 9822 8588 or email our team HERE.
