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 the tenant certain rights to a property for a set term. A commercial lease is used when leasing property primarily for business use.
You should never sign a lease (or even an offer to lease) without understanding all the terms and conditions. If you don’t understand what you are agreeing to, you could experience serious financial and legal problems. Leasing disputes can often end up in lengthy and costly litigation.
Douglas Cheveralls Lawyers can help you to understand any complex lease clauses, draft new clauses and help you negotiate the terms and conditions that suit you.
Retail lease or general commercial lease?
The Commercial Tenancy (Retail Shops) Agreements Act 1985 (“Act”) is specific legislation relating to retail leases (that fall within the definition in the Act). The Act is designed to promote fair leasing arrangements, improve communication and provide access to low-cost dispute resolution for the retail industry.
The question of whether a lease is a “retail” lease is not up to you, it is determined by reference to the Act.
For a new retail lease the Act requires the landlord to give the tenant:
- a written lease;
- a disclosure statement; and
- the Tenant Guide.
The disclosure statement outlines important information about the lease. It must be in the prescribed form and contain a statement notifying the tenant that independent legal advice should be obtained. It would also normally include details about:
- the term of the lease;
- whether there are options for further terms;
- the occupancy costs for leasing the premises (including rent and any outgoings);
- specific information for shopping centre leases;
- the tenant’s fit-out obligations; and
- if there are any relocation or demolition clauses.
The tenant guide is a prescribed form which gives notice of some of the tenant’s rights and obligations and some commercial matters that the tenant should be aware of.
Important issues to consider when entering into a commercial lease
A commercial lease will usually contain terms dealing with items such as:
- Description of the property - The lease should clearly describe all the property being leased, including bathrooms, common areas, kitchen areas and parking spots. It is often helpful to include a plan of the property in the lease.
- 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 as simple as it sounds if the shape of the property is irregular or the area includes a lift, more than one floor, an 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 it market based or in relation to the increase in CPI. It is common for fixed increases to occur during the term of a lease and for a market review to occur at the commencement of each option period.
- Outgoings - The lease should set out who is responsible for costs like utilities, property rates & taxes, insurances and repairs. If there are any common areas, the costs of outgoings relating to the common areas is usually shared between the tenants in the complex by reference to the respective size of their premises.
- Security deposit (sometimes called a bond) - The landlord will usually ask for some form of security from the tenant in case the tenant defaults on its obligations (eg by not paying rent). The security is usually for an amount equal to 3-6 months’ rent and can be by way of bank guarantee. The lease should also specify the terms regarding the return of the security deposit.
- Personal guarantees - If the tenant is a company then personal guarantees from the company’s directors may also be required in case the tenant company defaults on its obligations and becomes insolvent.
- 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 its 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) with multiple shorter options to renew.
- 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 tenant the ability to make longer-term plans for their business. Complying with the procedure and timing for exercising the option is critically important (see more information here).
- Improvements - A lease should address what improvements or modifications can be made to the property by the tenant (eg in fitting out the premises).
Old buildings may need lengthy and expensive modifications to comply with council and building regulations, for example regarding signage, fire exits and staircase rails. Non-compliance creates legal risk and may invalidate insurance policies. It is important that the lease sets out whether the tenant or the landlord is responsible for these improvements and who must pay for them.
- Repair, maintenance and make-good - Following non-payment of rent, this is probably the area that most commonly results in disputes and costly litigation. To avoid disputes arising, it is important that the lease clearly sets out who is responsible for maintaining the different aspects of the property (and the fittings and fixtures) during the lease, and what the tenant must to do make-good the property at the end of the lease. For example, does the tenant have to remove the tenant’s fit out or does the fit out stay in the property at the end of the lease? Does the tenant need to repaint at the end of the lease, and if so, only the interior of the premises, or also the exterior?
- Signage - Any restrictions on putting up signs, say that are visible from the street, will need to be included in the lease. Also, local zoning regulations may impose other limitations to signage.
- 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, and also check with the local council whether the business can operate in that area.
- Insurance - The lease should set out who is responsible for what insurance. For example, the lease will often say that the landlord will obtain building insurance, but that the cost of the building insurance will be recoverable from the tenant as an outgoing.
- Exclusivity clause - An exclusivity clause will prevent the landlord from leasing space in a commercial complex to a competitor, and its whether or not an exclusivity clause is included in a lease can have significant financial consequences for a business.
- Assignment and subletting - A tenant will want to maintain the right to assign the lease or sublet the space to another tenant if the business does not do as well as expected or if the tenant simply wants to move premises. Whether or not a tenant can assign or sublet the premises depends on what the lease says about this (you can read more about assigning and subletting leases here).
- Termination – how, when and by who the lease can be terminated should be set out in detail in the lease.
- Costs – the landlord may want the tenant to pay the costs of preparing the lease (however, if the lease is caught by the Act, the landlord is unable to pass these costs on to the tenant). What legal costs the landlord can recover if the tenant is in breach of the lease (eg costs on an indemnity basis) may also be included in the lease.
How Douglas Cheveralls Lawyers can assist
Douglas Cheveralls Lawyers have considerable experience in drafting leases, advising clients about leases and negotiating the terms and conditions of leases on behalf of both tenants and landlords.
Our significant experience in leasing litigation also helps the lawyers at Douglas Cheveralls Lawyers look out for things that can go wrong, which lawyers that only draft leases might not think to look out for.