Commercial Leases
Landlords and tenants of commercial premises both have an interest in ensuring that an appropriate binding commercial lease governs their relationship. The success or failure of the business may depend on the lease containing appropriate terms in a number of aspects.
17 Tips to Avoid Catastrophes when Taking a Commercial Lease
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Compare rents in the surrounding premises;
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Understand what is included in “The premises” e.g. storage, outdoor needs, parking etc;
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Get all promises from the landlord and agent in writing;
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Know the difference between “outgoings” and “services” and who pays/is responsible for the costs;
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Know whether the Family House is at risk under the personal Guarantor clauses and consider alterations to the lease/letter;
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Understand what you need to do about option clauses;
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Check cleaning and relocation clauses!
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Know how the rent review clause will work and whether they are fair;
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Check the history on maintenance and repairs of the building;
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Have a DA before you are committed to a lease;
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Think about whether the description of permitted use is appropriate for any changes you are planning for your business;
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Think about whether you wish to sublet;
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Check for reasonable notice in termination clauses etc reasonableness in heavy clauses;
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Negotiable proper easement to sewerage;
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Ask neighbouring businesses and look into your rights under parking;
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Ask about Fit out allowance and rent free period;
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Check the make goods clause.
The landlord is of course interested in obtaining a good return on his investment in the property. This will be achieved by having a good long-term tenant with a stable business. The tenant's interests are focused on the need for appropriate premises for the tenant's business.
When negotiating a commercial lease both parties must be certain of the definition of the premises. This is not normally a difficult question if the premises consist of the whole of a lot, however it is not unusual for misunderstandings to arise in respect of whether car spaces, balconies, courtyards, storage rooms, ceiling spaces, external surfaces of buildings, stairwells, roofs, rooftops and signage areas are included as part of the leased premises. A commercial lease should be unambiguous in defining the premises.
Both parties to a commercial lease must give consideration to the length of the lease and whether the tenant will be granted an option to renew for a further term (or terms).
The lease must be unambiguous as to the rent payable by the tenant. You must be clear as to whether any amounts shown in the lease are inclusive or exclusive of GST. Lease provisions permitting annual increases in rent should be able to be easily understood and applied in practice. Commonly commercial leases allow for CPI increases annually. Sometimes commercial leases specify that there will be an annual increase in rent to a fixed amount or by a fixed percentage. It is also common to see provisions requiring an increase to "current market rent". Typically current market rent is determined by negotiation between the landlord and tenant, and failing negotiation by a registered valuer.
A commercial lease must specify whether the tenant is liable to pay the outgoings of the premises in addition to rent. Alternatively the lease may specify that the outgoings are payable by the landlord. This is sometimes referred to as having a rent that is inclusive of outgoings. It is important to be clear on the difference between outgoings and services.
Generally "outgoings" are those expenses relating to the premises which would be incurred regardless of whether the premises were occupied or not. These include council rates, water rates, land tax, insurance premiums, strata levies and the like. On the other hand "services" typically includes, telephone, gas, electricity, cleaning, water usage and excess garbage disposal.
Typically a landlord will require some form of security for payment of rent and other liabilities of the tenant. Such security typically is in the form of payment of a security deposit expressed in terms of a number of month's rent plus GST and outgoings. Generally a landlord will permit the security deposit to be provided in the form of a bank guarantee. Landlords often require the security of personal guarantees of the directors of a corporate tenant.
The parties to a commercial lease must ensure that the leased document clearly specifies who is responsible for maintenance and repair of the premises including air conditioning systems. The document should also clearly specify the party responsible for maintaining the premises in respect of occupational health and safety and fire safety.
A tenant under a commercial lease should keep in mind that there are numerous actions which he or she may take at the premises which may require the landlord's prior consent. For example alterations to the premises, installation of signs, transfer of the lease to a new tenant (typically on the sale of the business operated at the premises).
Both landlords and tenants should be aware that if a dispute arises between them then the first thing to do to resolve a dispute is to read the lease document. A well-drafted commercial lease is an accumulation of experiences, perhaps dating back hundreds of years, and accordingly it is most likely that the lease will include a provision specifying which party is liable in the circumstances of the dispute. The remedies available to the landlord and tenant under a commercial lease can be harsh in their operation and invariably proper respectful communication and bona fide negotiations are important.