The lease provisions require that consideration be paid or payable in respect of the grant, transfer, or assignment of a lease or in respect of the acquisition of certain rights or interests pertaining to the underlying land.
Consideration is a word of wide meaning and refers to all things that a party would receive in order to move a transaction. In the context of the lease provisions, it includes all monetary and non-monetary consideration.
The provision of non-monetary consideration can include covenants given by a lessee to a lessor under the terms of a lease.
Often these covenants are provided to secure the right to use the land under the lease and will have a nil or nominal monetary value. However, a covenant pertaining to tenant’s improvements can have significant value where the improvements are required under the lease and become the property of the lessor at the end of the lease.
For example, where a lease requires a tenant to undertake structural work, construct improvements (such as buildings) or undertake a tenancy fit out and the improvements become the property of the lessor at the end of the lease, the value of the improvements may be regarded as consideration.
In determining whether such covenants constitute the provision of consideration for a lease, the Commissioner will consider all of the circumstances, including the term of the lease and the expected date of reversion to the lessor.
The Commissioner will also have regard to whether the covenants are the subject of any separate agreements between the parties for which there is adequate consideration supporting the mutual promises and obligations of the parties and whether any of that consideration and/or the mutual promises and obligations of the parties can be or should be construed as consideration for the grant of the lease.
Furthermore, where a lease permits, but does not require, a tenant to fit out the leased premises and the fit out does not become the property of the lessor at the conclusion of the lease, the value of the fit out would not be regarded as consideration under the lease provisions.
Similarly, “make good” payments on the conclusion of a lease will generally not be regarded as consideration under the lease provisions.
The Commissioner recognises that circumstances may arise in which it would be inappropriate to treat the covenants or promises made by a lessee under a lease as consideration. One such case involves a bona fide security arrangement.
For example, the Commissioner would not regard as consideration the provision of finance by a mortgagee in consideration of the grant of a mortgage of a leasehold estate where the mortgage occurs by way of the transfer or assignment of an unregistered lease of Victorian land or by way of the grant of a sub-lease.
In each case, the financier’s interest in the leasehold estate is subject to the mortgagor’s right to have the leasehold estate reconveyed to it or the sub-lease terminated upon repayment of the secured moneys.
Similarly, the Commissioner does not regard as dutiable the transfer back of a leasehold estate to a mortgagor once secured moneys have been repaid. The transfer or surrender of an interest in a dutiable lease that is a security interest is not liable for duty.
Another common situation the Commissioner would generally regard as not giving rise to duty under the lease provisions involves the transfer or assignment of a standard commercial lease for which nominal consideration is paid as part of a bona fide sale of a business which is conducted on the leased premises.
In such circumstances, the Commissioner recognises that a nominal sum of money may be attributed to the transfer or assignment of the lease purely for the enforceability of the arrangement between the parties.
Consistent with the policy underlying the lease provisions, a transfer of a lease in these circumstances would generally not be regarded as being used to effectively transfer rights in the underlying land. It should be noted, however, that this position may not apply where the lease provides the lessee with a right to acquire the property during the term or on expiry of the lease.
For more information on consideration, please refer to s20(3) of the Act and Revenue Ruling DA.053.