Whether you are a landlord or tenant, it is a major investment decision to lease premises.  Therefore, it is important to understand about the complexity and potential problems arising with a commercial lease. 

In contrast to the relative simplicity of residential leases that many people will have experience with, a commercial lease has extensive implications for a business.  These include potentially losing the business if something goes wrong.

This Basic Guide highlights some of the issues facing landlords and tenants and in a commercial leasing situation and what things to consider when negotiating a lease agreement.

Specific issues the Landlord should consider

If you are a landlord, you will need to consider a number of issues:

  1. You need to make sure that the lease is drawn up to meets your needs. You also have to understand how the lease will operate and what rights you have under it. A good lawyer will ensure that the lease documentation is adapted to cater for any of your special needs or requirements and then explain it all to you in plain English. Other interested parties will need to be consulted when the lease is prepared.  They will include your financier (if there is a mortgage over the property), your insurance broker, your property manager or agent and (if fit out works are necessary) your architect or builder. This will help to ensure that appropriate commercial terms are incorporated into the lease documentation.
  2. You will have to try and find a reputable tenant who you think will be trustworthy and whose business has a good track record of success.  You need to be confident the tenant will continue operating that business and be able to pay the rent on time and leave the premises in a satisfactory condition when the lease ends.
  3. Here are some other considerations you will need to take into account:
    • you will need to obtain appropriate security on the lease (e.g. a bond or bank guarantee, usually to the value of three (3) months’ rent and outgoings).
    • you should try and get personal guarantees from the directors or shareholders of the tenant company, so that they can be called upon financially to back up the company if it fails to meet its obligations under the lease.
    • you will need to work out who is responsible for the fit-out of the premises, who will own that fit-out when the lease ends, as well as responsibility for refurbishing the premises at the end of the lease.
    • make sure the lease describes precisely what the tenant is permitted to use the premises for, so you must find out what it is that the tenant is planning to do in the premises and how this may affect the premises or the structure of your building.
    • make sure you are obtaining the consent of your mortgagee for the lease. In NSW, when the lease term and any options to renew in a commercial lease totals more than three (3) years, the lease must be registered with Land Registry Services. This cannot happen unless registered mortgagee consents to the lease.
    • make sure you understand what the extent of your responsibilities are as landlord in relation to maintenance, repair and access to common areas, lobbies, lifts, toilets etc. If the premises are in a strata scheme, consider how strata levies will apply and how the by-laws and building rules interact with the lease.

Specific issues the Tenant should consider

Because your lease is one of your most important business assets, it is vitally important for you as a tenant to understand the important implications of the lease and to know what your rights and obligations under it are. 

Your business premises really are a centrally important part of your business and your business goodwill can be affected by your location, so you would not want to risk losing it all over a lease dispute. During a lease negotiation, you need expert legal advice to make sure that your needs and your rights are properly taken into account. This will not only enhance your business prospects, including if you decide to sell your business. Having a secure lease is an important consideration for anyone buying a business and can be a decisive factor in a business sale scenario.

Once you have found the ideal premises in the right location for your business, here are some issues you will need to consider when negotiating the lease:

  • Are there any specific requirements for disclosures by the landlord?
  • Do you need and can you can obtain relevant business licences (e.g. liquor licence) and the Council approvals to operate your business and complete any fit-out at the premises?
  • Is there any specific legislation that might apply to your particular premises, such as retail leasing legislation or Heritage legislation?
  • What warranties can you secure from the landlord regarding things like damage to the building and are you covered in case of a need to relocate or in the event of demolition of the building?
  • What insurance cover will you need to have in place for the lease and does your insurance broker have any thoughts on this?
  • How has the rent (and the outgoings) been calculated? Is it fair and equivalent to the market standard?
  • Are you able to negotiate a rent-free period and do you need access to the premises before the lease starts to arrange for your fit-out?
  • How and when will the rent be reviewed and what your responsibilities are in terms of outgoings.
  • How long should the term of the lease be? Do you want, or can you negotiate, any options for renewal? By the way, you must ensure you diarise the dates by which you will have to exercise any options to renew the lease.

General items for negotiation in a Commercial Lease

Here are some common items that most commercial leases will take into account, which landlord and tenant should negotiate and for incorporated into the lease documentation:

  • Rental payments – how much and when to pay.
  • Commencement date of rent period, depending upon completion of fit-out and obtaining relevant approvals for business etc.
  • Outgoings payable by the landlord or the tenant.
  • Term of the lease.
  • Options available for lease renewal and how and when to exercise the option.
  • What property in the premises belongs to the landlord and what property is tenant’s property.
  • Maintenance and repair – the landlord is generally responsible for structural repairs and tenant for day to day maintenance and repair of premises.
  • Use – what the premises can be used for and the type of business permitted etc.
  • Assignment/Sub-letting – whether the landlord gives consent and what approval procedure is in place.
  • Insurances required.
  • Car parking rights.
  • What can constitute a default under the lease serious enough to justify lease termination.
  • Each party’s obligations at the end of the lease.

Special considerations that apply to Retail Leasing

Retail leases are commercial leases used for shops and other retail premises and are regulated by some specific rules. Whether you are a landlord or a tenant, if you are entering into a retail lease you will need to seek advice and assistance from a legal expert to ensure that your rights and obligations are properly looked after. In NSW, the requirements of the Retail Leases Act in NSW are quite complex and they require expert interpretation.  Ignorance can result in significant penalties.

Here are some important things that the Retail Leases Act addresses concerning retail leases:

  • The definition of, and what constitutes, a retail business.
  • Obligations for landlords and agents to disclose and provide information to tenants quickly when entering into negotiation of a lease and also during the term of the lease.
  • Provisions for fit-outs and how costs are dealt with between landlord and tenant.
  • Restrictions regarding the advertising of available retail space to new tenants, unless the landlord has specifically offered a renewal or extension to the existing tenant which has been refused.
  • The security bond system requiring payment of a bond to the NSW Government’s Retail Tenancy Unit for investment and management.
  • Misleading or deceptive conduct by either party to a retail lease.
  • Independent retail valuers to determine rent reviews in the event that both parties cannot agree on the actual rent.
  • Details that landlords are required to provide in the disclosure statement relating to “disturbances” which might interfere with the tenant’s operations if they are to avoid liability.
  • Rules for the landlord’s relocation of leased retail premises within shopping centres.

Retail landlords and tenants should be aware of these aspects of the Retail Leases Act. Obtaining expert legal advice can save you money, time and potential heartache over contract negotiations.

How Craddock Murray Neumann Lawyers can help you

Over the years, the commercial leasing team at Craddock Murray Neumann has assisted many clients in relation to clarifying and negotiating commercial, industrial and retail leases.

We can assist you with:

  • Drafting leases and agreements for owners of shopping centres and a wide variety of other commercial and industrial centres.
  • Drafting car parking licences.
  • Drafting incentive, fit-out and naming rights deeds.
  • Negotiating lease agreements for tenants.
  • Assigning, varying or surrendering your lease.
  • Taking on an assignment of lease.
  • Enforcing the terms and conditions of your lease.
  • Advising on disputes you may have with your landlord or tenant.
  • Advising on special licensing conditions related to leases (e.g. liquor licensing, child care centres, medical centres, pharmacies).

For more information on how our property lawyers can help you with commercial, industrial and retail leasing, please contact our team at craddock@craddock.com.au