Leasing a Commercial Property

Date: Nov 01, 2009
Document Type: Newsletter

In recent newsletters we have had a look at leasing or renting residences and retail premises. The other type of properties often leased are commercial or industrial premises, and typical of these will be office premises, industrial units and workshops of various kinds.

As we have seen, there are very specific rules about the leasing of residences and retail premises; the majority of which are there to protect a tenant. This is not the case with commercial leases where the landlord and the tenant are in a free bargaining position – in theory – and there is very little protection for a tenant imposed by law – the terms of the specific lease will be the terms of the deal.

The lease is normally prepared by the landlord's solicitors, and will usually be a long and complicated document. The tenant will usually be required to pay the landlord's legal costs of the lease and is also liable for stamp duty on the lease. The tenant will also normally be liable for the costs of registering the lease on the title of the property and of obtaining the approval of any mortgagee from the landlord. If the lease is for a period of over three years, it should be registered on the title to give protection to the tenant.

These leases will often contain an option to renew – a right to extend the term of the lease – and one will hear leases referred to as a “3+3”. This is a three year lease with an option to obtain a further three period at the expiration of the original three years. Options will always specify the notice period required to be given by the tenant who will lose their renewal right if notice is not given as required by the lease. A new lease document is prepared and signed upon the exercise of an option to renew.

Many commercial leases provide that the tenant is to contribute to or pay "outgoings". These can include charges such as council and water rates and charges, land tax, insurance premiums, security costs and strata levies, and can be quite substantial. Details of these would normally be provided in the negotiating stage.

Commercial leases will normally make provision for the rent to be varied – meaning increased – usually annually. The calculation method would normally be either by the Consumer Price Index or by a fixed annual percentage. The commencement rental at the beginning of an option period is quite commonly based on an independent valuation, but of course, the parties can always agree on a figure. A fixed figure may be provided for in the option provisions.

The most significant detriment that a tenant under a commercial lease faces is that of eviction if in default and most leases only allow a fourteen day period of grace for paying rent before a landlord can take possession of the premises. A landlord does not need a court order for this: they can simply move in and change locks but must make the tenant's property available to them. It can be a swift and sudden self-help process. The motto for tenants, therefore, must be "Pay your rent on time!" Fortunately, the commercial reality is that landlords just want a reliable tenant and eviction is usually only a last resort.

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