The legal document that governs the relationship between a property owner (Landlord) and an occupant (Tenant) is a lease. Whether you are a Landlord or Tenant it is important to understand your respective rights and obligations.
What is a Commercial Lease?
A lease is a contract by which a property owner allows another party to occupy the property. A Commercial Lease refers to a lease for property that is to be used primarily for business purposes.
It is standard practice for the Landlord’s solicitor to prepare the commercial lease. The reason behind this is that as the Landlord is the owner of the property they should set the fundamental terms on which the property is to be leased.
For a Tenant it is important to properly investigate the property and have a lawyer explain and if necessary negotiate the terms of the lease with the Landlord’s lawyer before it is signed.
Issues to consider when entering into a Commercial Lease
A Commercial Lease should cover the following issues:
Length of Lease & Options
The lease will set out the length of the lease and any options to renew the lease.
An option allows the tenant to continue leasing the property on the same terms once the initial term of the lease has expired.
For a Tenant it is essential that they know the procedure for exercising the option contained in their lease. A Tenant should diarise the relevant dates and allow for ample time to exercise the option. The consequences for a Tenant missing the deadline for exercising the option can be very costly and damaging to their business.
The lease should clearly set out how much the rent is and when it is due. The rent is normally calculated on the area of the premises that can be used by the Tenant.
Rent will usually increase annually during the term of the lease, the common term for rent increases is ‘Rent Reviews’. There are a number of Rent Review methods, for example increases determined by a fixed percentage, market based or tied to changes in the Consumer Price Index (‘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 where an option for a further term has been exercised.
The Commercial Lease will set out who is responsible for costs like utilities, property rates taxes, insurance and repairs. A ‘Gross Rent’ refers to where the Rent is inclusive of all Outgoings except utilities (as these are based on the extent used by the Tenant such as power, gas, water, telephone and internet). A ‘Net Rent’ refers to where the Rent is exclusive of Outgoings.
A Landlord will usually ask for some form of security from a Tenant in case the Tenant defaults in their obligations such as the non payment of rent). If the Tenant is a company then personal guarantees from the company’s directors may be required by the Landlord. The Landlord may also request security by way of a bank guarantee for a certain amount (for example an amount that is equal to 3 months’ rent).
Maintenance & Repair
It should be clearly set out who is responsible for maintaining or repairing the property and the fixtures and fittings during the term of the lease. Disputes between Landlords and Tenants in Commercial Leases often relate to maintenance and repair issues.
Improvements & Make Good
It is important that the lease addresses what improvements or modifications can be made to the property by either party, 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.
Use of Property
The lease should include a clause specifying what type of business the Tenant can use the property for, normally referred to as the ‘Permitted Use’. From the Tenant’s perspective the Permitted Use should be as broad as possible in case their business expands into other activities.
A Tenant should contact their insurance company and discuss the clauses referring to insurance to ensure that the Tenant’s insurance policies are sufficient to cover the insurance requirements contained in the Lease.
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 and is often negotiated between the parties. The fairest position is that each party pays their own costs. It is important to note that in Tasmania if the Lease is a ‘Retail Lease’ the Code regulates what costs a Landlord can pass onto a Tenant. For more information on the application of the Code to a Commercial Lease, click here.
It is very important that Landlords and Tenants understand their rights and obligations with respect to a Commercial Lease.
We have substantial experience in assisting Landlords in drafting and negotiating leases together with acting for Tenants in reviewing and negotiating leases for office, retail, warehouse, industrial, farming and residential leases.
If you have any queries or require any assistance in relation to leasing, please contact us – https://www.simwolf.com.au/contact/