Australia: NSW Government: Sale Of 99 Year Leaseholds - Some issues that can arise

Given the current proposals by the NSW Government to release surplus commercial property by the sale of a long-term leasehold interests (usually 99 years), it is timely to consider some of the underlying issues.

Typically the property would be offered on the basis that:

• the successful acquirer is obliged to develop the land (either by construction of new buildings or by the refurbishment of old buildings);
• a premium is payable to the NSW Government for the grant of the lease;
• a 99 year leasehold is granted.

It is important to note that when a long-term lease is granted in order to maximise the market value of the leasehold interest being sold, the lease should contain as few restrictions on the lessee as possible. This gives the lessee flexibility to maximise returns over the term of the lease.

This paper looks at some of the issues which can arise.

FINANCIER ISSUES

A key consideration is to make the long-term leasehold "bankable". A financier must be comfortable when taking security.

To be good security the long-term lease must not be at risk of termination. To streamline transactions with long-term leasehold interests:-

• a proforma tripartite financier deed can be included in the lease document giving the financier notice of any potential defaults, appropriate rectification rights and the ability to deal with the leasehold.
• events of default should not include insolvency events – it is fundamental to the bargain that if a premium has been paid for the lease or improvements constructed by the lessee then the value of this investment should not be put at risk. Even if a lessee becomes insolvent, the value of the leasehold should remain available to its creditors.

REDEVELOPMENT DURING THE LEASE TERM

Subject to protecting any heritage component of the premises, the long-term lease should allow for redevelopment during the 99 year term. Again subject to the lessee establishing that the lessee has both approvals and funding to complete the redevelopment, as a starting point there should be very limited interference from the lessor.

WHAT WILL THE PREMISES LOOK LIKE AT THE END OF THE 99 YEAR LEASE TERM?

This is a difficult issue which needs to be tackled.

Naturally in the last years of the lease term, the lessee will not wish to expend money on the premises except to the extent of doing repairs and maintenance to maintain cash flows from tenants in occupation and to comply with health and safety legislation.

There needs to be a clear strategy.

If the premises include heritage items or are otherwise intended to have a life beyond the 99 year lease term, the lease needs to include mechanisms to:-

• ensure that proper maintenance is carried out. For example periodic reports from qualified heritage architects may be required to be provided over the 99 year term;
• minimise the risk that the lessee could be stripped of its assets in the last year or two of the term if large expenditure is required.

WHAT HAPPENS IF THE NSW GOVERNMENT SELLS THE FREEHOLD REVERSION?

The possibility that the NSW Government may decide to sell the freehold reversion at some point during the 99 year lease term must be considered. Any provision in the 99 year lease which might be acceptable while the NSW Government owns the freehold (such as giving the lessor rights to give or withhold consent to redevelopment in certain circumstances) may be inappropriate if the freehold reversion is sold and a new lessor takes an aggressive approach for its own commercial purposes.

Restrictions on the Rights of the Lessee to assign the 99 year lease or grant subleases

In New South Wales, if a lease is for a term of more than 40 years and is granted on the condition that the lessee carries out substantial works such as refurbishing a building, the lessee has the unrestricted right to:-

• assign the lease
• sublet the premises
• charge the leasehold interest
• part with possession of the premises

at any time other than in the last seven years of the term. The lessee simply has to give notice to the lessor of the transaction within six months. These rights are contained in the NSW Conveyancing Act 1919 in Section 133B(1)(b).

In theory this provides a mechanism by which a lessee could transfer a 99 year leasehold to an entity of limited financial resources if facing large expenses to maintain or repair premises accuracy in the final years of the lease term.

On the other hand, any lessee might be able to be stripped of its assets if the cost of complying with the obligations under the 99 year lease exceeds the then value of the 99 year lease.

To protect the NSW Government against these risks, it may be appropriate for the 99 year lease to oblige the lessee to provide some form of security to meet the cost of repairs and maintenance in the twilight years of the 99 year lease term.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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