If you’re under a Commercial Lease, it’s likely that you’ve come across the term ‘permitted use’. 

Generally, your Commercial Lease Agreement will set out a number of rules around what you can do during your lease. For example, whether you can sub-lease the premises to another business. 

It will also cover permitted use, which sets restrictions around what you can do with the space you’ve leased. Let’s go through this concept in more detail. 

What Is A Commercial Lease?

A Commercial Lease arises where an owner of certain property or premises leases that property to someone else, usually a business. 

So, the business pays rent to the owner of the property so they can use it for commercial purposes. 

In this business relationship, the business leasing the premises is known as the tenant, and the person who owns the property is the landlord. 

Both the landlord and tenant have rights and obligations under the lease. For example, some Commercial Leases will allow the tenant to sublease the premises to a third party.

Generally, a Commercial Lease should cover:

  • The duration of the lease
  • Costs
  • Repair and maintenance
  • Subleasing rights 
  • Permitted use (we’ll cover this below)
  • Termination

What Is Permitted Use In A Commercial Lease?

Now that we’ve covered the basics of a Commercial Lease, what is the meaning of ‘permitted use’ in this context?

The answer is pretty straightforward. ‘Permitted use’ refers to how you can use the premises. In other words, what business activities are permitted when you use the premises. 

For example, a landlord may specify that permitted use of a Commercial Lease is strictly for ‘hairdressing services’. This means a business that rents out the premises cannot open a grocery store or a cafe, as these are not hairdressing services. 

If you do decide that you want to use the premises for a purpose that is outside the scope of what your agreement allows, you’ll need to obtain written consent from the landlord and your local council. 

What Issues Can Arise Around ‘Permitted Use’?

It’s usually in the best interests of the landlord to keep the scope of permitted use quite narrow, in case they want to lease the premises to more than one business. 

This is because a narrow scope will reduce the chances of different businesses threatening each other’s competitive edge if they operate near each other. 

For example, if your permitted use is broad and is defined as ‘retail stores’, then a range of retail stores may conduct business on your premises. However, since they are of a similar nature, it can be extremely difficult to compete with one another. 

This can also threaten any exclusivity that the landlord may have negotiated with certain tenants. 

For tenants, however, it’s preferable to have a broad scope of permitted use so that they have more flexibility around what they can do with their business. For example, they can diversify or extend the range of their services to cater to a larger market, which is good for profit as well. 

Can I Sublease My Business Premises?

Like we mentioned briefly before, some tenants may be able to sublease the premises they are currently renting for their business activities. 

So, while the property is being leased to them by the original landlord, they can also offer part of the premises to a third party, known as the sub-tenant. These come as a separate set of obligations, so it doesn’t affect your obligations under the original lease. 

However, to sublease commercial property, you need to ensure your landlord allows this under the Head Lease Agreement. The best way to check is to Get Your Commercial Lease Reviewed

This consent would then be specified in your Commercial Sublease Agreement

This kind of agreement needs to be drafted carefully and according to the specific needs of your business. So, it’s wise to chat to a lawyer when going about this. 

Key Takeaways

‘Permitted use’ in a Commercial Lease basically means what the business (tenant) can and can’t do when they use the premises. So, it sets some boundaries around the nature of their business activities and what is permitted. 

If the business breaches the rules around permitted use, these can constitute grounds for terminating the Commercial Lease altogether. 

It’s important that your Commercial Lease is drafted carefully and correctly from the outset so you can ensure you’re compliant with this requirement (as it varies depending on your specific contract). 

If you need help deciding whether the rules around permitted use in your agreement are suitable for your business goals and overall future, chat to one of our lawyers. If you have any general legal questions, we can help you here too. 

If you would like a consultation on your options going forward, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.

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