Let me Be – the Skinny on Commercial Leases

When renting a business related property it is important for both Landlords and Tenants to understand the relationship they are entering into and the rights and obligations that they each have, the document that governs this relationship is usually a Commercial Lease.

So what is a Commercial Lease?

A lease is a legally binding contract that gives you certain rights to a property for a set term. A commercial lease is used when leasing property used primarily for a business.

You should never sign a lease without understanding all of its terms and conditions. If you don’t understand what you are agreeing to you could experience serious financial and legal problems.

It’s important to properly investigate the property and lease document before you sign. It is a good idea to ask your lawyer to explain each clause of the lease to you. Your lawyer can give you legal advice, draft new clauses and help you negotiate the terms and conditions to suit you.

Important issues to consider when entering into a lease

A commercial lease will usually contain terms dealing with items such as:

Rent: How much is the rent and when is it due? The amount of the rent will usually be calculated based on the area of the premises. This may not always be a simple as it sounds if the shape of the property is irregular or the area includes a lift, more than one floor, outdoor area or interior walls.

Rent Increases: Rent will usually increase annually during the term of the lease, with increases determined by a fixed percentage, be market-based or tied to the CPI. It is common for CPI or fixed reviews to occur during the term of a lease and for a market review to occur at the expiry of the initial term and each option period.

Security Deposit: The landlord will usually ask for some form of security from the tenant in case the tenant defaults on their obligations (e.g. not paying rent). The security is usually for an amount equal to 3 months’ rent and is by way of bank guarantee. If the tenant is a company then personal guarantees from the company’s directors may also be required. The lease should also specify the terms regarding its return.

Term of the lease: The lease should set out the length of the lease and any options to renew the lease and any terms relating to the renewal. A landlord will generally want a longer initial lease term (typically 3, 5 or 10 years) whereas the tenant is likely to want a shorter period (1-3 years).

Option to Renew: An option allows the tenant to continue leasing the property on similar terms at the end of the period of the lease for a further defined period and rent (subject to any review). An option gives the landlord potential greater security of income and the tenant the ability to make longer-term plans for their business.

Knowing the procedure for exercising the option especially when the option can be exercised is critically important

Improvements: A lease should address what improvements or modifications can be made to the property, who will pay for the improvements and whether the tenant is responsible for returning the property to its original condition at the end of the lease.

Description of the property: The lease should clearly describe all of the property being leased, including bathrooms, common areas, kitchen area and parking spots. Sometimes it is necessary to attach a plan.

Signage: Any restrictions on putting up signs, say that are visible from the street, will be included in the lease.

Use of the property: Most leases will include a clause defining what the tenant can do on the property (eg. What type of business). A tenant should ask for a broad usage clause just in case the business expands into other activities. It is essential that you check that any proposed use is consistent with the “purposes clause” in the Crown Lease that the landlord holds from the ACT Government.

Outgoings. The lease will set out who is responsible for costs like utilities, property rates & taxes, insurance, and repairs.

Insurance. You should contact your insurance company and discuss the clauses referring to insurance so you fully understand what is covered by the lease.

Exclusivity clause: This is an important clause for retail businesses renting space in a commercial complex. An exclusivity clause will prevent a landlord from renting space to a competitor.

Assignment and subletting: A tenant should maintain the right to assign the lease or sublet the space to another tenant. Usually, the tenant is still ultimately responsible for paying the rent if the business fails or relocates, but with an assignment or sublet clause in place, the business can find someone else to cover the rent.

Maintenance & Repair: the lease should clearly set out who is responsible for maintaining or repairing the property and the fixtures and fittings during the term of the lease.

Make Good: A tenant should carefully review the make good obligations in the lease.  Often these can be onerous and involve considerable expense on the tenant having to reinstate the premises to their original condition when the lease commenced.

Termination: The circumstances under which the lease will be terminated should be set out in detail in the lease.

Costs: The landlord may want the tenant to pay some or all of his legal fees and out of pocket expenses, this should be clearly set out in the lease. Legislation in the ACT may regulate what fees a landlord can pass onto a tenant.

Retail lease or general commercial lease?

The Retail Shop Leases Act 1994 has specific legislation relating to retail leases and recent amendments trigger new considerations when entering into a lease. This legislation is designed to promote fair leasing arrangements, improve communication and provide access to low cost dispute resolution for the retail industry.

For a new retail lease the landlord is legally required to give the tenant, at least 7 days before entering into the lease, a:

  • written lease with matters agreed to and signed off by both parties.
  • disclosure statement.

The disclosure statement outlines important information about the lease, it must be in the prescribed form.

Before entering into the lease the tenant is required to provide the landlord with a lessee disclosure statement. The lessee disclosure statement provides an outline of the potential tenant’s business background and experience. It allows the tenant to record the details of the representations made by the landlord or their agent.

Tenants who lease less than five retail businesses in Australia must obtain a legal advice report and a financial advice report and provide these completed reports to the landlord before entering into a retail shop lease or an assignment of a lease.

The tenant must meet with a lawyer for advice about the legal meaning and effect of certain terms and conditions of the proposed lease.

The tenant must meet with a qualified accountant for advice about the financial rights and obligations of the tenant under the lease.

Conclusion

It is very important that landlords and tenants fully understand their rights and obligations with respect to a Commercial Lease.

It is a good idea to ask your lawyer to explain what each clause in the lease means and to get their assistance in negotiating the terms and conditions that suit you.

If you or someone you know wants more information or needs help or advice, please contact us on 07 5458 9999 or email mail@sajenlegal.com.au.


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