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. If you intend to sell off parts of your property, or allow for mixed uses of the land in the long term, property subdivision may be required.
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, the property 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:
Carrying out a subdivision without formal planning approval is a breach of the Environmental Planning and Assessment Act 1979 (NSW), 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.
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.
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.
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.
There are a number of ways that you can avoid inadvertently carrying out an illegal subdivision of your land.
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.
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.
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.
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.
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.
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.
This article is not legal advice. It is intended to provide commentary and general information only. Access to this article does not entitle you to rely on it as legal advice. You should obtain formal legal advice specific to your own situation. Please contact us if you require advice on matters covered by this article.