WHAT IS A COMMERCIAL LEASE?
A commercial lease is a lease of commercial property and includes office space, industrial workshops and warehouses, retail shops (whether in they are in a shopping centre or not), storage sheds, working yards and other non-residential property. The lease is a legally binding document that gives you a right to use the property for a set term.
Your conveyancer or solicitor will make sure that you understand the lease terms and conditions. If you do not get the correct advice you may be entering into an agreement that could cause you financial and legal problems in the future. You also will need to ensure that you are allowed to use the premises for your business in particular as each lease will define what you can or cannot do on the premises.
NEGOTIABLE ITEMS THAT YOU WILL NEED TO CONSIDER BEFORE ENTERING INTO A LEASE:
The terms and conditions that will apply to your commercial lease are usually negotiated between the landlord and the tenant prior to entering into the lease.
Some typical terms and conditions that are negotiated are as follows:
- The length of the term of the lease and any options for renewal;
- The amount of the rent, outgoings and the rent reviews
- responsibility for maintenance, repairs and structural works;
- any tenant’s works on the premises and what the requirements and conditions are;
- any landlord’s works and when they need to be completed by;
- Bank Guarantees or upfront Security Bond payments that the landlord will require
STANDARD TERMS AND CONDITIONS AND WHAT THEY MEAN:
Rent: How much is the rent and when is it due? The amount of the rent is often calculated based on the area of the premises but this is an item that will be determined in the initial negotiations.
Rent Increases: Rent is usually increased annually and will be either determined by a fixed percentage, CPI or market review and sometimes a combination of a CPI plus a percentage. Most common is 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 and at the start of each renewal period.
Term of the lease: The lease will set out the length of the lease as agreed between the tenant and the landlord along with any rights of renewal of the lease. Generally the landlord will prefer a longer term whereas the tenant is likely to prefer a shorter term. All leases must be for a Minimum 5 year term and the term of a retail shop lease is worked out on the assumption that any right or option of renewal or extension under the lease will in fact be exercised. A lease is not invalidated if the lease is less than the five year minimum term but is automatically extended to bring the term (or aggregate term) to five years.
The five year minimum term does not apply to a lease if:
- (a) the lease is a short-term lease (ie a lease entered into for a fixed term of 6months or less); or
- (b) the lease arises when the lessee holds over after the termination of an earlier lease with the consent of the lessor and the period of holding over does not exceed 6 months;
- (c) the lease contains a certified exclusionary clause; or
- (d) the lessee has been in possession of the retail shop premises for at least 5 years; or
- (e) in the case of a retail shop lease that is a sublease—the term of the retail shop lease is as long as the term of the head lease allows; or
- (f) the lease is of a class excluded by regulation
Security bond: Only one form of security bond can be paid for the same retail shop lease and a security bond cannot exceed four weeks’ rent.
Bank Guarantee: More often than not a bank guarantee will be required to be provided to the landlord prior to entering into the lease and the amount is usually equal to at least three months’ rent and outgoings and GST.
Rights of Renewal A right of renewal allows the tenant to continue leasing the property on similar terms at the end of the initial period of the lease for a further defined period and rent (subject to any review). If the Lease contains a right of renewal for a further term, the landlord will be bound by that right of renewal. Knowing what is required to exercise the right of renewal is very important and is detailed in the lease.
Make Good: The tenant should be fully aware of what the make good obligations in the lease are as often these can be onerous and will involve considerable expense to reinstate the premises to their original condition when the lease commenced.
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. The air conditioner is nearly always required to be maintained by the tenant but any replacement would be at the landlord’s cost.
Assignment and subletting: The tenant should have the right to assign the lease or sublet the premises to another tenant. However this will always be subject to the landlords approval. The tenant will still ultimately responsible for paying the rent if the business fails or relocates subject to the provisions of the Retail and Commercial Lease Act 1995. Most Commercial Leases will contain a term requiring the Landlord’s consent to be obtained before the Lease can be assigned or sub-let, or any even prohibit it entirely.
Exclusivity clause: This is an important item and needs to be clear as if there is no exclusivity clause then the landlord can rent any neighbouring property that they own to a competitor.
Insurance: In most leases it is the tenants responsibility to insure all plate glass on the premises, their own business assets and public liability for $20,000,000.00. The landlord will insure the building but may pass this cost on to the tenant.
Outgoings: The lease will set out who is responsible for costs such as utilities, rates & taxes, insurance, cleaning and any other outgoings.
Use of the property: Most leases will include a clause defining what the tenant can use the premises for and the tenant would be required to get consent form the landlord if they wish to use the premises for any other purposes. You will also need to check with the local council as to whether the use you require is permitted.
Signage: Any restrictions on putting up signs will be included in the lease. Your local council should also be contacted to ensure what their requirements or limitations are.
Description of the property: The lease should clearly describe all of the property being leased, including any shared or common areas, in particular toilets and bathrooms, kitchen facilities and carparking areas. If the lease is not for the whole of the land then a plan of the property should be included.
Property Improvements: The lease will detail what improvements or modifications can be made to the property and who is liable for the payment of these. It will also determine whether the tenant is responsible for returning the property to its original condition at the end of the lease.
Change of Ownership of the Premises: If you purchase a commercial building with an existing lease then you are purchasing that property subject to the lease. The tenant may negotiate different terms and conditions including rights of renewal but they are not obliged to change anything from the lease that they have originally entered into. A Deed of Assignment of the lease will be required to document the change of ownership for the property and the tenant would be provided notification of this at settlement.
Costs: In Retail Leases the landlord cannot pass more than half of the costs of the preparation of the lease on to the tenant. When consent is required for any assignment or transfer of the lease, the landlord will seek reimbursement of any legal costs of their conveyancers or lawyers from the vendor/outgoing tenant
Registration of the Lease: It is not compulsory to register the lease on the Certificate of Title to the land but may be beneficial to do so if you are the tenant. Your conveyancer or solicitor will be able to explain the benefits of doing so to you. In most situations the registered lease is triplicated and both parties and the Land Titles Office receive a copy. Only one of these copies will have a ‘registration sticker’ from Land Titles Office and this copy is usually held by the landlord. A survey plan may be required for registration of the lease if renting a portion of the land.
Stamp Duty: Since 1 January 2008, stamp duty has not been payable on a Commercial Lease executed on or after that date. However, it is still may be payable on the transfer or assignment of a Lease.
Termination: The circumstances under which the lease will be terminated should be set out in detail in the lease
RETAIL AND COMMERCIAL LEASES ACT 1995:
The Retail and Commercial Leases Act 1995 has specific legislation relating to retail leases over business premises at which goods or services are sold or provided to the public where the rent is below $400,000 a year. This legislation is designed to provide additional protections to retail tenants and imposes a range of obligations on commercial landlords, when compared to non-retail commercial leases. Further specific information must be provided for shopping centre leases.
For a new or renewed retail lease covered by the Act, the landlord is legally required to give the tenant a copy of the pro forma lease and a written disclosure statement, which outlines important information about the premises and the lease, such as:
- the permitted uses of the shop,
- the lettable area,
- access arrangements
- rent, outgoings and other services: and
- a range of other items
Although many of the terms of a commercial lease are fairly standard, it is important that you fully understand your rights and obligations, especially the provisions which relate to retail leasing.
If you are a tenant you should contact a conveyancer who is experienced in retail leasing or a commercial lease lawyer to review the terms and conditions of the lease to ensure that they suit your purposes.
The team at McKay Business Services are all members of the AICSA and are proud Adelaide conveyancers