Commercial Lease: Practical Issues & the Planning Law Perspective
The contractual relationship between lessee and lessor and the myriad of issues which inevitably arise in this regard has after a number of years once again found itself at the forefront of proposed reform. This article shall focus specifically on the commercial aspect of the lease contract and particularly upon related matters of interest from a planning law perspective.
A. When is a lease contract deemed ‘commercial’ in nature?
The nature of the lease contract and the legal provisions applicable to the same are determined by identification of the tenement to be leased as ‘commercial’ or otherwise. Maltese law clearly defines a ‘commercial tenement’ for the purpose of lease as ‘an urban tenement which is not a residence and which is leased to house an activity primarily intended to generate profit and includes, but is not limited to, an office, a clinic, a tenement leased out for the sale of merchandise by wholesale or retail, a market stall, a warehouse, a storage used for commercial purposes as well as any tenement licensed to sell things, wines, spirits or foodstuff or drinks, theatre, or tenement mainly used for any art, trade or profession’ (Art. 1525 Civil Code).
Reference is further made in this regard to the considerations of the First Hall (Civil Court) in the case Joseph Briffa et vs. Setra Trading Limited (701/2014MC – 16th March 2017) to the effect that the above-cited definition provides a non-exhaustive list of activities which may be deemed ‘commercial’ for the purposes of a lease contract. The determining factor in this context is not the activity per se, but rather whether the said activity is intended to be carried out for the purpose of generating profit.
It would appear that the civil definition of activity considered ‘commercial’ in the context of lease is wider than the definition attributed to those uses deemed specifically ‘commercial’ in terms of planning law. Subsidiary Legislation 552.15 ‘Development Planning (Use Classes) Order’ establishes the various classes of development and identifies the type of permit required in each case. Schedule 1 (Category D) of the said legislation which classifies particular activities as ‘Commercial Uses’ contains the following sub-division – 4A (Financial, Professional and Other Offices); 4B (Retail); 4c (Food & Drink Establishments where no cooking is allowed); and 4D (Food & Drink Establishments where cooking is allowed).
In vew of the above – and particularly consequent to the broad interpretation attributed to a ‘commercial’ lease from a civil law perspective – the use of a leased tenement for the carrying out of activities which are not classified as strictly commercial for the purposes of planning law [including ‘tourism and leisure uses’ (Category C); ‘industrial uses’ (Category E); and ‘storage and boathouse uses’ (Category F) may nonetheless attract the applicability of the particular provisions contained in the Civil Code designed to regulate the lease of ‘commercial tenements’. In this context, the identification of the intended use of the tenement to be leased is significant and ought to be clearly and specifially stipulated in the relative contract together with the other elements required by law as discussed below.
B. What constitutes a valid commercial lease contract?
Maltese law defines a contract of ‘letting and hiring’ as a ‘contract whereby one of the contracting parties binds himself to grant to the other the enjoyment of a thing for a specified time and for a specified rent which the latter binds himself to pay to the former’ (Art. 1526 – Civil Code). No distinction subsists between commercial and other types of lease in terms of the elements which are required in order for a lease contract to be deemed valid at law.
(i) Lease Contract in Writing Ad Validitatem
Reference is made in this regard to Article 1531A of the Civil Code [introduced by virtue of Act X 2009 1] which stipulates that contracts of lease entered into after the 1 January 2010 shall be made in writing – this as recently affirmed by the First Hall (Civil Court) in its decision dated 27th April 2016 in the case Maria Caruana pen vs. Carmel Mifsud (57/2016JPG).
This rule is applicable irrespective of whether any verbal agreement subsists between the parties in question and whether by agreement between the parties – prior to the conclusion of the written contract — the future lessor or lessee shall have taken concrete steps and possibly incurred expenses in relation to the proposed lease. At this stage no valid contract of lease subsists between the parties and therefore, in the event that either party shall eventually refuse to enter into the contract as agreed (or shall default in performance of some other condition verbally agreed upon) the agreement is not deemed enforceable as a contract of lease before the Rent Regulation Board.
(ii) Agreed Use of the Property
The above-cited Article 1531A further stipulates that a valid lease contract entered into after the 1 January 2010 must indicate: (a) the property to be leased; (b) the agreed use of the property; (c) the period for which that property will be let; (d) whether such lease may be extended and in what manner; (e) the amount of rent to be paid and the manner in which such payment is to be made. In the absence of any one of these ‘essential requirements’ the contract shall be considered null and for all intents and purposes of law no lease shall be deemed to have been entered into by the parties.
It is pertinent in this context to once again specifically refer to the stipulated ‘agreed use’ of the property. This requirement merits careful consideration in the commercial context particularly in the event that planning permits shall be required in relation to the business activity intended to be conducted from the tenement in question. Reference must necessarily be made in this regard to (a) the category of activity proposed – according to the content of SL.552.15; and (b) the location of the ‘commercial tenement’.
The latter element is especially relevant in terms of evaluating the applicable planning policies and the likelihood of granting of the relative permission on the part of the Planning Authority.
In this regard Article 72 of the recently promulgated Development Planning Act (Cap. 552) 2 provides that in determining an application for development permission the Authority shall have regard to various factors including plans, policies and other material considerations (eg. existing commitment on site). In its recent decision in the case Planet Court Owners Association vs. L-Awtorita’ tal-Ippjanar et (154/16MS) 3 the Environment and Planning Review Tribunal evaluated an application for change of use from Class 4B to Class 4D in relation to a tenement situated on the Sliema seafront in Sliema. In brief, the Tribunal considered that – notwithstanding the degree of commitment in particular areas – the application concerned a specific site located in a zone categorized as ‘Residential’ in the relative Local Plan. The proposed change of use could therefore not be deemed compatible with the same and the permission previously granted by the Planning Authority was revoked.
In the context of a commercial lease therefore, pertinent questions which may be discussed prior to the conclusion of the lease contract include (i) what type of permission is required?; (ii) who will be filing the relative application?; (iii) who will bear the expenses involved at application stage and possible at appeal stage in the event of refusal?; and (iv) will the lease be terminated if permission is not granted?
The above serves to highlight the importance of identifying those issues which may arise throughout the course of the proposed lease and of seeking to address the same in the relative contract. Whilst a valid lease contract must necessarily contain those elements established by law as discussed earlier, the content of the contract is certainly not limited to the same and may be drafted on an ad hoc basis. With specific reference to contracts concerning ‘commercial tenements’ and the conducting of business activity therefrom, it is particularly important to clearly regulate the contractual relationship between lessor and lessee to avoid disputes and the incurring of damages and/or expenses in connection with the same.
- 1 Civil Code (Amendment) Act promulgated on the 19th June 2009 introduced wide-ranging reform in the field of lease.
- 2 Legislation which regulated the MEPA de-merger and came into force in April 2016.
- 3 Currently subject to appeal before the Court of Appeal (Inferior Jurisdiction).