SMSF Commercial Lease Agreement

SMSF Commercial Lease Agreement – including ‘related parties’

Your Self-Managed Super Fund (SMSF) can own commercial property. The SMSF can even lease commercial property to a member. However, the commercial lease agreement must comply with the law. Special rules in the drafting of the SMSF Commercial Lease Agreement are required.

Our SMSF Commercial Lease Agreement seeks to satisfy the Superannuation rules.

An SMSF must only benefit you when you have retired. You are not allowed to get any benefit from your SMSF. Sure, your superannuation belongs to you. But you can’t have it until you retire.

The rules are so strict that you can’t lease from your SMSF a residential property, car or artwork. Even if the rent was a fair market price. The one exception is ‘commercial real property’. Your SMSF can potentially lease commercial property to you, your family and other related parties.

Seven rules when leasing commercial property to ‘related parties’

When a member leases commercial property from their SMSF, seven additional rules apply. Special rules apply when an SMSF leases to a ‘related party’. Our SMSF Commercial Lease complies with the strict Superannuation law’s seven rules:

1. lease agreement – prepared by a lawyer
2. an arm’s length transaction – the SMSF can’t give ‘special treatment’ to a related party
3. market rent – the lease agreement allows you to reset the rent to market, as required
4. due payment – appropriate rent payment dates
5. recovery – the SMSF is required to take appropriate action to remedy any breaches
6. evidence – sufficient evidence and paper trail for the SMSF auditor and ATO. This confirms that no advantage is given to the member leasing the commercial property
7. legal – complies with both the Retail Shop and Commercial Tenancy legislation throughout Australia and the Superannuation Laws

SMSF Commercial Lease fails ATO scrutiny

An accountant shows me a non-complying self-managed super fund. It owns commercial property. Its blemish? It does not have a correctly drafted SMSF commercial lease. It was a good lease. However, it did not address the requirements of the SIS legislation. It failed the ATO audit.

Your SMSF Commercial Lease Agreement must comply with Australian Superannuation law. If your SMSF is noncompliant, the ATO applies penalties and additional taxes.

SMSFs require specialist leases. The commercial lease should be subservient to the Superannuation rules. It is not enough to use a standard commercial lease. Legal Consolidated’s SMSF commercial lease fully complies with the SIS Legislation.

Our SMSF Commercial Lease is designed for SMSFs. What if your SMSF is leasing the commercial property to a non-related party? It is still essential that the Lease complies with the SIS Legislation.

Extra issues when leasing to a member

There are additional challenges when leasing to a member. For example:

1. Member gains an advantage. For example, the rent charged by the SMSF is too low. A member illegally gains an advantage.

2. Member gives an advantage to the SMSF. For example, the rent is too high. Therefore, the member illegally injects funds into the SMSF. This is a contribution by the member or a ‘related person’.

SMSF ‘Related people’ include:

• members
•  associates of members
• relatives of members
• business partners and their spouses and children
• trusts controlled by members or associates
• companies controlled by members or associates

The ATO watches ‘related party’ transactions closely.

The lease between the SMSF and the member must, therefore, be at arm’s length. The SMSF cannot give ‘special treatment’ to a related party in the commercial lease. The trustee cannot give ‘favours’ to the leasing member.

You must have:

1. a legally prepared and legally enforceable written lease agreement – designed for the SIS legislation
2. rent paid on time as required by the Commercial Lease Agreement
3. the SMSF taking appropriate action to remedy breaches

There are many SMSF rules in leasing. Legal Consolidated follows them

Our firm’s Commercial Lease Agreement complies with up-to-date Superannuation law, including:

* Superannuation Industry (Supervision) Act 1993
* Superannuation Legislation (Consequential Amendments and Transitional Provisions) Act 2011
* Superannuation (Financial Assistance funding) Levy Act 1993
* Superannuation (Resolution of Complaints) Act 1993
* Superannuation (Rolled-Over Benefits) Levy Act 1993
* Superannuation Industry (Supervision) Consequential Amendments Act 1993
* Superannuation Supervisory Levy Amendment Act 1993
* Occupational Superannuation Standards Amendment Act 1993
* Superannuation Act 2005
* Superannuation Act 1990
* Superannuation Act 1976
* Superannuation (Productivity Benefit) Act 1998
* Superannuation Benefits (Supervisory Mechanisms) Act 1990
* Superannuation (Family Law – Superannuation Act 1922) Orders 2004
* Superannuation (Family Law – Superannuation Act 1976) Orders 2004
* Superannuation Guarantee (Administration) Act 1992
* Superannuation Industry (Supervision) Regulations 1994

SMSF auditors require a copy of the lease before signing the yearly audit.

Our law firm’s SMSF commercial lease complies with the Superannuation laws. It improves compliance. We make the auditor and ATO auditor happy (well as much as they can be).

Special SMSF rules for lease disputes

Our SMSF Commercial Lease Agreement:

* accommodates low-cost dispute resolution alternatives. This complies with both leasing and Superannuation Laws
* reduces unconscionable conduct claims against the SMSF
* is audit friendly for both your auditor and the ATO

Subletting commercial property in breach of the Superannuation Laws

The Tenant has no authority to sublet or assign, under this Lease. This is unless the Landlord and Tenant mutually agree, subject to the Superannuation laws. The ‘waive and variation’ clause permits subletting and assignment — but is subject to the Landlord’s consent.

Fair Damages that don’t breach Superannuation Contribution rules

If the Tenant (member) defaults in payment, the landlord (SMSF) recovers liquidated damages, from the Tenant. It is important that this is not a ‘contribution’ to the fund. Our unique formula calculates damages that avoid ‘contribution breaches’ by the SMSF.

Without these pre-liquidated damages calculations, a commercial lease breaches the Superannuation law. Most Commercial Leases breach Superannuation laws.

Waivers ensure ongoing compliance with the SMSF Commercial Lease Agreement

Many lease agreements can’t be updated. However, if the Superannuation laws change, then this may render your SMSF non-complying. You suffer penalties of up to half the value of your SMSF.

With our lease, the Landlord may alter the Commercial Lease, together with the Tenant, to suit changing needs. If a term is waived, the Landlord is no longer bound by that requirement and the SMSF fund continues to be compliant.

SMSF Lease vs Sublease vs Assignment of Lease

Consider a ‘sub-lease’ and an ‘assignment of lease’:

• Sub-lease: The Tenant signs a Lease. But the Tenant does not need all the space, at the moment. So the Tenant tries to ‘sub-lease’ to a third person. 
• Assignment of lease: Or, your tenant wants to vacate early. The tenant finds a replacement tenant. The SMSF, as the landlord, signs an Assignment of Lease.

Sub-leases and Assignment of Leases are common. And they are legal. However, when it comes to an SMSF leasing commercial real property it is better to build a brand new Commercial Lease.

Sub-leases and Assignments of Leases may be considered too complex or confusing. The SMSF auditor may want to dig deeper into what is going on. The SMSF auditor may want the SMSF to provide more information and get external consultants to sign off on the chain of events.

If you can, then a new SMSF Commercial Lease is simpler and safer.

Auditor and SMSF Lease

If the ‘business real property’ is leased, your auditor looks for an up-to-date:

1. SMSF lease; and
2. property valuation.

This is especially true if the SMSF is leasing to related parties. Ensure the lease is on an arm’s length basis. You need fair market rent. Otherwise, the SMSF is taxed at 45% on its non-arm’s length income.

The SMSF auditor for Commercial Lease reviews:

1. Does the related-party tenant satisfy the terms of the lease?
2. Has the related party tenant paid all the required rent and outgoings?
3. Is the Lease Agreement prepared by an Australian lawyer? If not, is it an enforceable and genuine legal document? Who is going to check it?
4. Any rent adjustments? Are they consistent with market rents?
5. If the rent is indexed for inflation or some other formulae is the tenant paying this higher rent?

SMSF Property in a Custodian (Bare) Trust? 

An SMSF can not borrow money. Borrowing is considered too risky. There are exceptions to this rule. One exemption is borrowing money through a ‘Bare Trust’ (Custodian Agreement).

In a property transaction involving an SMSF and a bare trust, the landlord is typically the trustee of the bare trust, not the trustee of the SMSF. The bare trustee holds the property title and acts as the landlord until the loan is repaid and the property is transferred to the SMSF.

How to structure a Commercial Lease for a Limited Recourse Borrowing Arrangement (LRBA)

Every superannuation law firm has its own view on how a Commercial Lease is set up when there is a Limited Recourse Borrowing Arrangement (LRBA) in place.

An SMSF borrows to buy a property through a bare trust called a Custodian Trust. The Custodian Trust holds the property as a bare trustee for the SMSF. The Trustee of the Custodian Trust is the ‘legal owner’ of the property. Eventually, if and when the loan is paid off at that time the property is transferred into the name of the Trustee of the Self-Managed Superannuation Fund.

Who should be the Landlord? The trustee of the Custodian Trust or the trustee of the SMSF?

Legal Consolidated’s Commercial Lease has the landlord as the trustee of the Custodian Trust (i.e., the trustee of the Bare Trust). In other words, the Trustee of the SMSF is not the Landlord. The Legal Consolidated SMSF Commercial Lease helps manage the eventual transfer of property to the SMSF. This is how it works:

1. Initial Arrangement: During the period the property is under finance, the trustee of the Custodian Trust, as stated in Legal Consolidated’s Commercial Lease, holds the legal title and acts as the landlord.
2. Automatic Transition: Upon repayment of the debt on the property and when the property is transferred, there is an automatic transition in the Commercial Lease. The role of the landlord seamlessly shifts from the trustee of the Custodian Trust to the trustee of the SMSF. This is automatic under the Legal Consolidated Commercial Lease.
3. Simplified Process: This transition, in Legal Consolidated’s Commercial Lease, occurs without any manual intervention or additional documentation to the Commercial Lease. It streamlines the process and helps ensure compliance with superannuation and SIS regulations.

We have found that this approach satisfies both your auditor and the regulator, the Australian Tax Office.

Who is the Landlord while the property is in an SMSF Bare Trust (Custodian Trust)?

Here is an example of a Commercial Lease where the SMSF is gearing the property through a Limited Recourse Borrowing Arrangement (LRBA):

• Keller Nominees Pty Ltd is the trustee of the Keller Super Fund.
• The Keller Super Fund borrows money to fund the purchase of a commercial property.
• To allow for that the Keller Super Fund holds the property through a non-recourse loan this is through a separate company that holds the property in a bare trust.
• We will call the separate entity 238 Adelaide Terrace Pty Ltd ACN 88383763838 as trustee for the 238 Adelaide Terrace Custodian Bare Trust.
• The Keller Super Fund now wants to lease out its commercial property.
• The landlord is 238 Adelaide Terrace Pty Ltd.
• Many years later the money is paid back. The Keller Super Fund now transfers the property to the trustee of the Keller Super Fund Keller Nominees Pty Ltd.
• Without needing to amend the Legal Commercial Lease the landlord is now Keller Nominees Pty Ltd.

While the commercial property is in a Bare Trust then the trustee of the Bare Trust (only) is the Landlord. (The Trustee of the SMSF does not become the landlord until such time as the property is finally transferred out of the bare trust to the trustee of the SMSF.)

The SMSF Custodian Bare Trustee is the Landlord during the Limited Recourse Borrowing Arrangement (LRBA) for a Commercial Lease

• The trustee of the George and Jenny Superfund is a company Black Nominees Pty Ltd.
• The George and Jenny Superfund borrow money to purchase a commercial property.
• The Super Fund does this through a Bare Trust (Custodian Trust).
• The Trustee of that Bare Trust is White Nominees Pty Ltd.
• White Nominees is the Landlord (not Black Nominees Pty Ltd).

When the happy day comes that the property is paid off then the property is transferred to Black Nominees Pty Ltd atf the George and Jenny Superfund. The Legal Consolidated SMSF Lease caters to and allows for this future event.

Full free sample of a Self-Managed Superannuation Fund Lease Agreement

Press the PDF above to see our cover letter and a sample of a Commercial Lease for an SMSF.