- A commercial lease is a legally binding agreement between a landlord and a business tenant for the rental of property.
- Compared to a residential lease, commercial leases are more complicated as the lease terms can vary significantly from lease to lease and may also vary according to whether the lease is for commercial premises or retail premises.
- Before signing a commercial lease, both parties need to understand the terms and ensure they can meet all the terms and conditions.
Leasing Commercial Premises
A commercial lease is a document that sets out the rights and obligations of the owner of a commercial property (known as the landlord or lessor) and a third party that has agreed to occupy the property (known as the tenant or lessee). When entering into a lease negotiation, you should understand your obligations and obtain legal advice before signing anything. Commercial premises contain additional obligations compared to residential leases for proviate tenants. Thse include zoning, permits and building requirements. Moreover, consumer laws that apply to residential leases do not cover commercial leases.
Retail Premises Legislation
New South Wales has specific retail leases legislation (the Act). The Act specifies which premises are considered to be retail premises. If a business is located in a retail shopping centre and/or wholly , or predominantly carries on a retail business, it is likely that lease will be governed by the provisions of the Retail Leases Act. Generally speaking, the Act aims to ensure retail leasing arrangements are fair and that there are built in mechanisms to resolve disputes between landlords and tenants.
Negotiating a Lease
Commercial lease terms are usually negotiable between parties. When negotiating a lease, the rights and obligations of both parties should be on the table for negotiation. The types of rights and obligations set out in a commercial and/or retail lease can include signage, fit out of premises, using common areas, the rules of the building, use of public facilities and so on. As a tenant, pay attention to your specific circumstances before you make a commitment to a lease. An inexperienced tenant will sometimes accept the first lease they receive, to their detriment. This is poor negotiation practice – there is no requirement or obligation on a prospective tenant to accept the first lease. A better practice would be to have a lawyer review your lease and advise on any unfair provisions and negotiate amendments with the landlord or the landlord’s lawyer.
Fixtures and Fit-Out
A condition report of the premises should be obtained before entering into a lease. This report will provide information on the fixtures, fittings and services installed at the premises. The various retail leases legislation requires that a disclosure statement be provided by the landlord.
In addition to ongoing rent costs, there are a number of costs to be borne by the tenant, including:
- Security bonds;
- Insurance costs;
- Legal costs (lease preparation in some cases and costs on default);
- Repairs and maintenance; and
- Make good at the end of the lease.
It is important to obtain advice on these matters before agreeing to a lease. For example, lease preparation costs cannot be passed on under the Retail Leases legislation. However, there is no such restriction with respect to commercial leases.
Assignment of Lease
A lease may allow tenants to assign the lease or sublet the whole, or part, of the premises to another tenant. This can be exercised in cases where a business decides to sell or can no longer operate the business. In most cases, assignment will be subject to a landlord’s consent and/or the various retail leases legislation if it is a retail lease.
- A potential tenant should make enquiries and conduct research relevant to the business, the lease and the property before making any commitments to buy, lease, take on an assignment or incur any other obligations.
- What is the duration of the commercial lease? Is there an option period (or periods)? A financier may be unwilling to lend for a term that substantially exceeds that available under a lease.
- A lessee may be responsible for the payment of any outgoings. For retail leases the landlord must detail the outgoings the tenant has to pay in the disclosure statement prior to entry into the lease.
Key Terms in Lease negotiations
Term of Lease
The length of the term of the lease will affect the goodwill of your business. The term of the lease will be security of tenure for the desired time. It should be a period where business operations will not be interfered with by the landlord.
A lease is just one document required in a suite of documents in leasing a premises. Preliminary documentation can comprise a heads of agreement, an agreement to lease, a lease incentive or contribution deed (if the landlord will be contributing to your fit-out costs) and the lease itself.
If it is a retail lease, a landlord is required to give a tenant various disclosure documents before the lease documents are entered into.
In entering a commercial lease, disputes may arise between tenants and landlords. The lease will usually be the first document referred to in resolving any disputes. In resolving disputes, options will include informal negotiations, mediation, litigation (court) and various state based tribunals in certain circumstances.
Frequently Asked Questions about Commercial Leases
Q: What is an anchor tenant?
A: An anchor tenant generates significant foot traffic for other premises in the building (such as a supermarket or department store). A lease provision can be incorporated to terminate a lease if an anchor tenant departs.
Q: What can a landlord do about a tenant in default?
A: A landlord with a right to evict a tenant can request formal eviction if rent has not been paid. Written notice must be given of non-payment before any consequences can be faced by the tenant. The landlord must comply with the lease and any legislation in this regard.
Q: Is a redevelopment clause valid?
A: A redevelopment clause entitles the landlord to terminate a lease, before the end of the lease, in order to carry out major works. Whilst it is valid, a tenant should be compensated for redevelopment. Leases may include both redevelopment and demolition clauses.
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