When renting a property for business purposes it is important for Landlords (property owner) and Tenants (occupant of the property) to understand the rights and obligations that they each have in relation to both each other and the property. The document that governs the relationship is known as a Commercial Lease.
What is a Commercial Lease?
A lease is a contract by which one party conveys land to another party for a specified time, usually in return for payment of rent. A Commercial Lease refers to a lease for property that is to be used primarily for a business.
It is standard practice for a Landlord's solicitor to prepare the lease. 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
Term 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 at the end of the initial term of the lease for a defined period and rent (normally the rent is subject to review).
For a Tenant it is essential that they know the procedure for exercising the option contained in their lease. A Tenant should allow for ample time to exercise their option. The consequences for a Tenant missing the deadline for exercising the option can be very costly and damaging to their business.
Rent - 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. 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.
Outgoings - This term refers costs such as 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. The lease will set out who is responsible for payment of the outgoings.
Security Deposit - 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 an amount equal to 3 months’ 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.
Improvements & Make Good - The Lease should address 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 state what type of business the Tenant can use the property for, this is normally referred to as the ‘Permitted Use’.
Insurance - A Tenant should contact their insurance company and discuss the clauses referring to insurance to ensure that the Tenant’s insurance policies are amended to cover the insurance requirements contained in the Lease.
Legal 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 and is often negotiated between the parties. The fairest position is that each party pays their own costs.
Retail Code - For retail business this Code will normally apply. For more information on the application of the Code to a Commercial Lease, please visit https://www.cormistonlegal.com.au/news/2018/7/31/when-does-the-retail-code-apply-to-leases-in-tasmania
It is very important that Landlords and Tenants understand their rights and obligations with respect to a Commercial Lease.
We are able to assist Landlords in drafting and negotiating leases or Tenants in reviewing and negotiating leases for office, retail, warehouse and industrial leases.
If you have any queries or require any assistance in relation to leasing, please contact us on 03 6332 9353 or use our contact us form - https://www.cormistonlegal.com.au/contact-us/