A commercial lease usually entails a long-term financial and business commitment. With many leasing disputes resulting from ambiguous terms or misunderstandings between the parties, it is important to obtain legal advice before committing to the transaction.
The following overview of typical leasing provisions will assist in preparing for your lease negotiations. Our Lawyers have extensive experience in commercial leasing matters and will guide you through the process to achieve a fair arrangement and to ensure you are aware of your rights and responsibilities.
A lease is an arrangement whereby a property owner (landlord) allows a person or business entity (tenant) to occupy certain premises. In exchange for paying rent and upholding the obligations under the lease, a tenant is entitled to uninterrupted possession of the premises and is free to conduct its business in accordance with the permitted use. A commercial lease may pertain to any non-residential premises such industrial, retail, factory or office space.
Leases classified as ‘retail’ fall under specific legislation which regulates the tenant / landlord relationship. Landlords leasing retail premises have additional responsibilities such as providing prospective tenants with disclosure statements prior to entering into the lease. Other matters such as minimum lease terms, rent reviews and assignment provisions are also regulated.
A lease should always be in writing. The terms should be clear and unambiguous and include obvious matters as well as a range of contingencies for unforeseen events such as what happens if the premises is damaged or destroyed.
The following items are typical for all leases:
- The parties and property. Parties entering a lease need to know who they are dealing with. We will obtain title and company searches to confirm that the parties are accurately described and legally entitled to enter the transaction. The property title will show any dealings affecting the property so that these can be dealt with in the documentation.
- The leased area. The lease must include a legal description of the premises as well as the street address including building names and shop or unit numbers. The lease should include a floor plan highlighting and indicating the size of the leased area. Use of car spaces, storage facilities and amenities should also be noted. This is particularly important where the premises forms part of a larger space or includes common areas.
- Rent and rent reviews. The lease will contain details of the rent, the frequency and method of payment and when and how a rent review may take place. Rent reviews may be by reference to the Consumer Price Index, market review or a set percentage on each anniversary of the lease.
- Outgoings. The lease should state who is responsible for the property’s outgoings and list the relevant items. Outgoings include utility services, ongoing repairs and maintenance, rates and taxes, cleaning, gardening and security. A tenant may be responsible for all or a proportion of outgoings and an estimate of these costs should be obtained by the tenant before entering the lease.
Disputes regarding outgoings and what constitutes repairs and maintenance are usually resolved by interpreting the terms of the lease – careful drafting when preparing the lease will reduce costly misunderstandings down the track.
Certain expenses are not recoverable as outgoings if the lease falls under the Retail Leases Act. For those that may be recovered, landlords must give tenants an itemised list of outgoings and the method for calculating these.
- Permitted use of premises. The lease should state the permitted use of the premises. Despite what is noted in the lease however, it is a tenant’s responsibility to ensure the proposed use of the premises complies with any Council or other requirements and any necessary licences are obtained.
- The term of the lease. The term of the lease and any renewal options should coincide with a tenant’s business plans and a landlord’s future plans and investment strategy for the property.
- Options. Leases containing options to renew will set out a time period within which a tenant can exercise (give notice) of the option. Option periods should always be diarised to avoid missing out on renewing or terminating the lease.
There are many other matters to consider when entering a commercial lease. Negotiations often include allowances for fitting out the premises for the tenant’s proposed use. The lease should set out the nature of work permitted, who is responsible to pay for the fit out and what happens to the fittings on termination of the lease (for example, whether the lessee must restore the premises to its original condition).
Parties must understand their rights and obligations with respect to insurance, attending to repairs and maintenance and contributing to capital works. Provisions to assign or sublet the lease, should the tenant seek an early release from its obligations, should also be considered.
Being familiar with the terms of a commercial lease is the first step towards securing a good ongoing tenant / landlord relationship. Our Lawyers will walk you through the leasing process, negotiate the terms to best protect your interests and provide comprehensive advice on your rights and responsibilities.