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Commercial Property Lease

Leasing a Commercial Property

What is a commercial property lease

A commercial property lease provides you with the legal right to occupy a commercial space or premises. It also sets out the agreement between you and the landlord or the lessor. 

If you comply with the terms of the lease, the landlord cannot evict you—the tenant or lessee. Moreover, the landlord cannot, sell the premises without recognising your right to occupy them or interfere with the business you operate from the premises. They also cannot charge you any moneys not covered by the lease.

Why is a commercial property lease required

A commercial property lease protects you by setting out all the terms agreed between the landlord and you.  Moreover, it ensures that you can operate your business from the premises.

However, unless these terms are in writing, there can be disagreements as to what was previously agreed. In addition, there are normally many issues in the lease, which can last for a long time.

Exactly how much will it cost me to occupy the premises

The rent, outgoings and rent reviews vary from lease to lease and are set out in the Schedule to the lease. Hence, when reading a commercial property lease, you need understand what it is about. 

You must also refer to the items in the schedule to check the specifics of your occupation of the premises. Moreover, to avoid misunderstandings, all items in the schedule should be completed or marked “Not Applicable.”

an image of a smiling female flower shop owner arranging flowers after a successful commercial property lease

Rent

This is the amount payable by you to the landlord for occupying the premises. For example, you may have been quoted the rent on a per metre basis or as $x/m2. If this is the case, the rent in the lease will be expressed as a figure. You can calculate this by multiplying the rent/metre2 by the size of the premises.   

The rent you were quoted by the landlord or his agent, would have been described as including outgoings, excluding, or before outgoings. If it was including outgoings or gross rent, then this is the only amount you must pay regularly under the lease. However, if the rent has been expressed as a net rent, then the rent before outgoings is recovered from the tenant. 

The rent is normally subject to review at various times during the commercial property lease. In addition, the timing and basis of such reviews must be set out in the lease.

Outgoings

Rents are usually quoted excluding or before outgoings. Outgoings are some of the landlord’s expenses in owning the premises. These can include:

  • council rates
  • water rates
  • land tax
  • management fees
  • security
  • strata or other levies
  • cleaning

The lease document sets out the type of outgoings you will be liable for. Meanwhile, the Schedule sets out the percentage of outgoings for the premises you are occupying—usually at 100%.

However, if the premises are part of a building, then the percentage of outgoings will be less than 100%. Moreover, this percentage is the proportion the premises represent of the building.

What to remember when considering the outgoings

In some cases, you will not be charged with the actual outgoings relating to the premises. Instead, you will be charged with the increases in outgoings or the increases above the amount the landlord is required to pay at an agreed date.

For example, the Council rates as at 1 July 2000 are $1,000 and will increase to $1,100 on 1 July 2001. If you are only liable for increases in outgoings above those payable on 1 July 2000, then you will be charged with $100.

It is normal but not essential that you pay outgoings or increases in outgoings from a base date. Moreover, the lease may also require you to pay interest, if you are in arrears paying the rent. You may also be charged for other payments under the commercial property lease.

The combination of rent and outgoings to be paid is a matter for negotiation. However, it is very important to understand from the lease exactly what outgoings you will be liable to pay. Remember, these are payable in addition to the rent. 

Goods and Services Tax

In general, the landlord will be liable for payment of Goods and Services Tax (GST). However, the landlord will want to pass this cost onto you. Hence, you must be aware if the rent includes GST, or if GST is an additional cost. Moreover, in most cases, you will be entitled to an input tax credit for GST paid on rent.

Term of the Lease

This is the length of time the landlord and you are committed to. There are several factors which may influence the term of the lease. For example, if the business is new, then you might want to consider a short lease. This will allow you to not be committed for too long if the business is not successful.

However, if the term is too short, a business may not be saleable without a lease extension or a new lease. Therefore, it is a good idea to negotiate a shorter base term with several options.

If you decide to vacate the premises for any reason, it is best to try to find a replacement tenant yourself. However, if you cannot find one or are unable to, you are technically liable for the rent at the end of the term. Moreover, in those circumstances, the landlord has a responsibility to limit, or, legally speaking, ‘mitigate’ its losses. Hence, the landlord must make all reasonable efforts to re-let the premises as soon as possible after you vacate.

As with any problem, especially financial ones, the worst thing to do is to ignore and hope it will go away. Therefore, if you find yourself having difficulties continuing with the business, approach your landlord and discuss the problem. The landlord may prefer to accept a lower rent than have the premises vacant. 

an image of a female personal shopper helping her client fit clothes in her shop on a commercial property lease

Option to Renew

The landlord may grant you an option to renew the lease.  In some cases, they may even grant you an option to purchase the premises. Although uncommon, they may also give you a first right of refusal if they decide to sell the premises. 

Generally, an option gives you the right to renew the lease for a specified period as set out in the lease. The landlord is bound to accept any renewal, provided you comply with the terms of the lease to exercise that option. 

However, it is most important that the option be exercised correctly in the manner and within the time allowed. Moreover, at the time the option is exercised, you shouldn’t be in default of the essential provisions of the lease. 

Whilst you are not bound to exercise your option, having one enables you to renew the lease for a further term. This is a very important consideration when you take into account any goodwill you are creating at the location.

Most problems that you may encounter during the term of your lease can be dealt with. However, the one thing you cannot fix is if you lose the option to renew your lease. This may happen if you do not exercise the option in accordance with the terms of the lease. 

What to remember when considering your renewal options

Before deciding to exercise the option, check how the rent for the renewed term will be calculated. If it is market rent, make sure to find out how much that rent is likely to be. 

Consequently, if you exercise the option, you may be bound to a rent which the business cannot afford. If this happens, you should try to negotiate a better rent with the landlord before exercising the option. However, be careful not to run out of time.  

It is imperative that you take note of how and when to exercise the option and record the appropriate dates. Usually, the lease will be for at least 3-5 years. Unfortunately, this is the sort of detail you may well forget. Therefore, record the date and how to exercise the option from the beginning of the term. We suggest you enter these details in your diary or on a calendar on the last day of each year of the term of the lease. Give yourself several reminders during the last year of your lease.

The lease will provide the exercise of the option during a specific period, e.g., not earlier than 6 months from the expiry date of the lease and no later than 3 months from that date. You lose the right to renew if the option is exercised outside these dates.

Personal guarantee

If you want to use a company or trust to enter into the lease, then the landlord may request for personal guarantees. The landlord may obtain personal guarantees from the directors or shareholders of the company, or the Guarantors.

A personal guarantee is the guarantor’s promise to pay the landlord if the company or trust fails to make payments. The guarantor will also take responsibility if the company fails to meet any of its other obligations under the lease.

It is important that you use the right entity to operate the business as the tenant. For the entity to be legal, it must be a natural person or an entity with legal status. If you operate your business under a business name, then the tenant should be the entity that owns that business name. However, a business name is not a legal entity.

Bank guarantee or security deposit

In addition to or in place of a personal guarantee, the landlord may require a bank guarantee or security deposit.  A bank guarantee is your bank’s promise to pay the landlord if you break the terms of the lease.  However, the bank will only pay the amount up to the limit of the bank guarantee.

A bank guarantee also allows the landlord to avoid the need to go to court to enforce payment. However, you will have to give the bank some security before you can obtain a bank guarantee. Usually, the amount of the guarantee or security deposit is equivalent to 3 months’ rent.

In general, you should avoid providing a personal guarantee as it places the guarantor at high personal risk. A lease is one of the few transactions where this can be avoided on the basis of providing an alternate guarantee. Therefore, you should negotiate for the lease to only require a bank guarantee.

Maintenance

Normally, you are responsible for the day-to-day maintenance of the premises, whilst the landlord is responsible for all structural repairs. Consequently, these obligations can change if the landlord and tenant agree otherwise.

Unfortunately, structural repairs can be very expensive. Hence, you must carefully check the lease to avoid accepting any obligation to make structural repairs without even realising it. It is also a good idea to take photographs of the condition of the premises before occupation to avoid arguments later.

an image of a female chef holding a tray of fruits and vegetables in her restaurant's kitchen commercial property lease

Use

The lease normally states how you may use the premises for.  However, the use specified in the lease must accurately and fully describe your intended use. Moreover, the fact that the lease permits a type of use does not mean such use is permitted by local council zoning.  Hence, check the permissible use for the premises with the local council for the area first. You may also check with the local council regarding:

1. Consent for Intended Use

The fact that a use is permitted by the local council may not be enough to start operating the business. You need to find out whether you have to apply to the council for consent for your intended use of the premises. 

This type of approval is usually required by the local council. Even if the same type of business operated previously, you must check if the local council approved such use.

2. Ownership by the Landlord

When checking with the council ask for a search of the premises. In doing so, you can confirm the landlord or owner of the premises.

The council records will disclose if there is any discrepancy in the ownership of the property. If the landlord on the lease is different from that in the council records, then you can request for an explanation. Moreover, you can ask the landlord for proof that they are the correct party to enter into the commercial property lease with. 

3. Signage for your Business

Also, remember that the local council may need to approve the signage you intend to use in connection with your business. You must also check with the council if there are signs attached to the premises or on an awning or structure overhanging the footpath. 

4. Development Application and Construction Certificate

You may also need to get consent from the local council before you can start any local development to the premises.  To get consent, you need to lodge a Development Application with the council. You can also check with the council about how long they expect the consent to take.  

In addition, aside from obtaining the local council’s approval for the use of the premises, you will also need a Construction Certificate. A Construction Certificate enables you to start any structural building work on the premises. However, discuss your plans with the planning and building department first to avoid doubt. Moreover, letting your planning and building department know your plans can also help you can help you avoid council rangers from stopping your builders.

5.Length of time to get an approval

To negotiate an appropriate rent-free period, you will need to know how long any approvals are likely to take.  You should also take into consideration other such matters as:

  • How long it will take to have telephone lines and any other services connected to the premises.
  • The availability of workmen to fit out the premises.
  • Any delays in obtaining your staff, equipment, stationery and other items you need for your business.
 

If you intend to operate a specialised business from the premises, you may need other licences or consents. These are matters that need to be checked with the appropriate licensing authority. 

an image of two young women arranging tables and chair in their small cake shop

Assignment/sub-letting

Generally, the lease does not allow a tenant to assign a lease or sub-let any part of the premises without the consent of the landlord. The landlord should not be entitled to refuse consent unreasonably.

The landlord will, in most cases, request references, particularly financial ones. Such activities are in relation to the person or company who you want to sublet or assign the lease to. 

You should check this type of clause carefully, because consent to assignment does not necessarily release the outgoing tenant from all obligations under the lease.  If the incoming tenant breaches the lease, the landlord may have rights against you as the original tenant. If this is the case, ask the landlord to amend the commercial property lease.

Insurances

In most leases, the landlord must keep the property insured against fire and the usual risks. Hence, you are only required to take out a public liability policy for the amount set out in the schedule.

In addition to the insurances required under the lease, you should insure your fixtures, fittings, and equipment. You should also consider a loss of income policy and sickness and accident insurance for yourself or other key personnel. Moreover, your staff must be covered for workers’ compensation insurance.

It is important to check the clauses of the lease in the event the premises are damaged or destroyed. You should also check what moneys are payable and whether the landlord is required to reinstate the premises or not.  

Moreover, no compensation is payable if the lease is terminated in these circumstances. Hence, you should have insurance to cover this possibility.

Alterations and building works

You can only alter the premises and make structural changes with the consent of the landlord. In addition, you should get the landlord’s approval before installing any signage in connection with the business. You must also get the consent of the local council or other authorities to carry out the work. 

However, if you need to carry out any works, you should advise the landlord or their agent before entering the premises. Also, you may only carry out the works in a proper and workmanlike manner.  

an image of a group of friends toasting to the opening of their restaurant after acquiring a commercial property lease

What other rights or obligations do I have?

In addition to the rights and obligations discussed, you have the right to:

  • enjoy the premises quietly during the term of the lease, subject to the landlord’s rights to inspect the property, as set out in the lease.
  • ask the landlord to repair any structural problems you did not cause.
  • have the landlord pay all outgoings for the property as they fall dueeven if you are liable.
  • access any common areas or services of the building of which the premises form part of.
  • have the landlord maintain any common areas or facilities, including lifts, toilets, air conditioning etc., 
  • ensure the landlord obtain the mortgagee’s consent and register the lease.

 

Some complexes have building rules. You will be given a copy of these rules and expected to comply with them. If the premises are part of a strata title complex, you will be required to comply with the strata by laws. Moreover, the strata levies will be included in the outgoings.

End of the commercial property lease

At the end of the lease, you are obliged to vacate the premises and return it to the landlord in the condition required by the lease. However, if the lease is terminated, the landlord has the right to remove your goods, fixtures and fittings. They also have the right to dispose of, or charge you for storage of, those items.

If the landlord allows you to remain in possession of the premises without giving you a new lease, then you become a monthly tenant. When this happens, either party is required to give the other one month’s notice to terminate the monthly tenancy.

Default

The lease will also set out what constitutes a default and the consequences of the default. If the tenant breaches any terms of the lease, the landlord has the right to issue a written notice. Such notice shall advise details of the breach and a time during which the default must be rectified.

If you get a notice of default, try to comply with it or approach your landlord to discuss a possible solution. If you can’t see any way to fix the breach, at least you can discuss moving out on your terms and paying back an agreed amount of arrears without the landlord suing you.

The most common default involves the nonpayment of moneys payable under the lease. If you are 14 days late or more in making payments, the landlord can demand possession of the premises or enter and take possession of the premises. In most cases you will also become liable for interest on those moneys.

However, it is unusual for a landlord to enter and take possession of the premises. It is more prudent for them to apply to the court for an order for possession. Moreover, if a landlord does exercise their rights, without an order of the court, they may be responsible for any damage caused to the tenant.

Breach

If you have breached the terms of the lease and the landlord takes possession of the premises, you can apply to the court for ‘relief against forfeiture’. You will need the assistance of a solicitor to take this type of action. The court will make orders reinstating your tenancy if you can demonstrate you have or can remedy the breach. This usually means being able to pay the arrears. You will be liable for the landlord’s costs of any enforcement proceedings or for the application for relief against forfeiture, unless the landlord is completely mistaken.

It is important to remember that a lease provides that the tenant is liable for the landlord’s costs, enforcing the lease if the tenant is in breach. 

Need help with your legal matter?

AussieLegal offers affordable legal kits and paralegal services on a wide range of legal matters including applying for a commercial property lease. Whilst we are not a law firm and are not permitted to provide legal advice, we work under a collaborative arrangement with a panel of independent law firms across Australia. Thus, allowing us to help our clients with more complex legal tasks that require formal legal advice.

Need more options? Call us on 1300 728 200 to discuss your situation with one of our consultants.

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