Leasing part of your land can convert your unused commercial, industrial or agricultural space into a predictable income stream. It can also involve hidden costs if you do not account for the impacts that the Conveyancing Act and planning legislation could have on your lease.

Leasing part of your land can turn your unused commercial, industrial or agricultural space into an income stream. It can also involve hidden costs if you do not account for the impacts that the Conveyancing Act 1919 (NSW) and the Environmental Planning and Assessment Act 1979 (NSW) (EP&A Act) could have on your lease.

This article explains when deemed subdivisions can pose issues for your leases and sets out options to avoid unexpected costs and delays.

Deemed Subdivisions

When you think about subdivision, you might picture a greenfield site, being divided up into individual lots that can be sold off to prospective home owners. In that case, a developer would engage a surveyor, submit development applications to council and obtain formal approval to start subdivision works.

You might not be thinking about your next commercial lease. However, in New South Wales, the Conveyancing Act deems that the following types of leases are actually subdivisions of land:

  • Leases of part of land, with a total term of more than 5 years; and
  • Subleases with a total term of more than 5 years.

Carrying out a subdivision without formal planning approval is a breach of the EP&A Act, which can result in prosecution and fines. There is also a risk that a court could declare your lease to be void and release the tenant from their obligation to pay rent.

Leases for more than 5 years

The 5-year time period includes any options to renew the lease or sublease. If you lease part of your land for an initial term of 3 years, with an option to renew for a further 3 years, then you have a deemed subdivision. If you lease the same part of your land for exactly 5 years, the subdivision provisions will not be triggered.

Leases of part of land

A lease of part of a premises with a unique description and postal address, is treated differently to a lease of part of the land. You can lease Shop 1 in a shopping centre, Suite 2 in a commercial office building or Unit 3 in a large warehouse without any deemed subdivision issues arising. You can also lease designated car parking spaces, that are shown in a plan with clear dimensions of each car parking space.

Deemed subdivision issues will arise if you are leasing part of land. This might be part of a vineyard, or agricultural land or other open area.

Describing the leased area

When leasing part of land, it is important that all parties have a clear understanding of the boundaries of the leased area. Installing fencing or other markers can guard against disputes.

If the lease is being registered, you will need to attach a plan of the leased area to the original lease.

The five-year time limit comes into play in this context as well. If your lease runs for 5 years or less, you can prepare a simple plan, and cross-hatch the leased area. If the lease is for a longer term, you will need a registered plan of subdivision, which has been approved by your local council.

Solutions

There are a number of ways that you can avoid inadvertently carrying out an illegal subdivision of your land.

5-year term

One option is to keep the total term of your lease to 5 years or less. It is still open to you to negotiate a new lease with your tenant towards the end of the 5-year period.

Consecutive leases

One common means of avoiding the deemed subdivision issue is to enter into a series of consecutive leases. If you intend to lease part of your land to the same tenant for 10 years, you could enter into one lease that runs from 2017 to 2022 and another that runs from 2022 to 2027. Additional costs are incurred in preparing and registering multiple leases, however, the process is much faster and less expensive than obtaining a subdivision certificate.

Some doubt was cast over the consecutive lease approach when the Victorian Supreme Court considered a series of leases of various portions of a pine plantation near Tumbarumba in NSW.

In Equuscorp Pty Ltd v Belperio [2006] VSC 14:

  • the owner of a pine plantation leased 2 hectare portions to investors;
  • each investor signed a series of consecutive leases, with a combined term of 25 years;
  • the plantation was not profitable. The owner went into insolvency and the investors stopped paying rent under their leases;
  • the owner’s rights and obligations under the leases were assigned to Equuscorp;
  • Equuscorp claimed that the investors had repudiated the leases and attempted to recover unpaid rent.

The Court accepted a substance-over-form argument and treated each set of consecutive leases as a single 25 year lease. This meant that a number of illegal subdivisons had occurred on the plantation without the appropriate approvals.

The leases were void for illegality as well as uncertainty. The boundaries of each plot had not been defined with any degree of detail. The end result was that the investors were not required to pay any rent to Equuscorp. This reasoning was upheld on appeal in 2008 (see Equuscorp Pty Ltd & Anor v Antonopoulos [2008] VSCA 179).

It has remained common practice to register consecutive leases since these cases were decided. However, you should be aware of the risks associated with this approach.

Licences

In some cases, it is appropriate to grant a licence over part of your land, instead of a lease.

We often prepare leases of premises which are accompanied by licences which allow tenants to use car parking spaces, storage spaces or access roads.

A licence is a contractual relationship, that is not registered on title. A licensee under a licence has less protections than a tenant under a registered lease.

Subdivision

If you intend to sell off parts of your property, or allow for mixed uses of the land in the long term, subdivision may be appropriate. Our property team can provide advice on the pros and cons of subdivision in your particular situation.