Commercial Leasing

As most commercial lease terms and conditions are negotiable, particularly in a competitive market, the tenant should discuss the following points with the landlord ASAP.  They are not exhaustive and BEFORE YOU SIGN ANY LEASE, a complete review of the heads of agreement and the lease should be done.

BEWARE of landlord heads of agreement!!!!

Make sure that any heads of agreement you are asked to sign are not binding until formal leases are signed.  That of course is a two edged sword.  We suggest that you have us review the heads of agreement before it is signed off.  Even if it is not binding, it may be too late to try and change things later.

Also, don’t agree to sign a heads of agreement that contains a provision stating that the lease will otherwise be on the landlord’s normal terms and conditions.

Term – you have nothing at the end of it!!!!

Remember that when the lease term ends, you have no right to be compensated for any site goodwill that you generate during the lease.  Therefore, you need to ensure that the lease term and option periods are adequate for your needs.  If your business is a start up and the landlord will agree, you may be best to negotiate a short first term of the lease and longer later option terms while you assess the viability of the business.

Make good & decoration – what are you required to do?

A tenant will ordinarily be liable to remove from the premises all of the tenant’s fitout at the end of the Lease and depending on the definitions of what the tenant is required to remove, can even pick up responsibility to remove things that are not part of the tenant’s property but which belonged to or were fitted by a prior tenant.  That can cost a lot and some say as much as 80% of the cost of the original fit out.  If possible, ensure that you are not liable for this obligation.

The finishes of a shop front or premises interior will often have to be repainted etc on a regular basis.  If a tenant does not want this, make sure it is a condition of the negotiations.

Air conditioner – does it work, when and who has to maintain and fix it?

Normally a landlord makes no warranty about the air conditioning’s suitably or adequacy.

So make sure the tenant knows, who is responsible for repairs of the air conditioner, who is responsible for its replacement and what are the tenants rights if it does not work properly.  If that happens, preferably have it so that the rent is reduced until it is fixed.  Check who pays for the electricity, including out of hours.

Market rent reviews – up and down, not just up and watch those gross rental base year provisions!!!!

Insist that market rent reviews can result in rent going down as well as up and try to avoid CPI reviews.

Be careful in any option to ensure that if the rent review of a gross rental is not to market, that the base year is updated for the option period.

Outgoings – exactly what outgoings do you have to pay?

If you are paying any outgoings at all, make sure you understand what is included in them and it excludes any capital items of the landlord.

Lease incentives and rebates – can they be clawed back and how calculated?

Ensure that any lease incentive cannot be clawed back under any circumstance and that you understand exactly on what rental amount any rebate amortisation will be calculated.

Security deposit – do you have to supply one?

No law requires you to give any security for payment of the rental and performance of your obligations.  This is negotiable.  Therefore, try and exclude any obligation to provide security.

Landlord’s lawyer’s costs – don’t agree to pay them?

Normally the lease requires the tenant to pay the landlord’s costs and disbursements including stamp duty. See if you can negotiate out of this.  If the lease is a retail lease, the Retail Leases Act does not allow a landlord to recover costs for the preparation of the lease.

Services to the premises – are they adequate?

Make sure that the services to the premises are adequate for the tenant’s proposed needs – eg is the power supply adequate.  Upgrades to existing services can be costly and sometimes cost prohibitive.

Personal guarantees – don’t offer or give them!!!!

Don’t give personal guarantees in support of tenant obligations when you don’t have to – certainly don’t offer them. If the tenant is a company, don’t assume that director guarantees won’t be required if they have not been requested.  If you don’t want to give them, make sure that it is a specific condition of the lease negotiations that they will not be required or given.

Assignment – don’t assume you walk away without obligation if you later assign your lease!!!!

Unless the lease says or indicates to the contrary, the normal commercial lease provides that the tenant will continue to be liable to the landlord on an assignment of lease, including under any option.  Therefore, try and ensure that if the lease is assigned, the tenant and any guarantor gets a release of its future obligations under the lease.  If the lease is a retail lease, Section 41A gives the tenant and guarantor the opportunity to get a release on assignment.

Use – will the landlord allow you to do what you want?

Make sure that the permitted use rights under the lease are sufficiently broad enough and if appropriate, exclusive use rights are granted.

Zoning – will council regulations restrict what you want to do including any works you want to carry out?

Usually, the landlord makes no warranty that the particular use is permitted under the relevant zoning laws. It cannot be assumed that the proposed use is permitted within the zoning restrictions of the Council and you must satisfy yourself about this before agreeing to the lease terms.

Landlord obligations – make sure your landlord has to do these things!!!!

Ask the landlord to agree to add clauses to the lease to the effect that the landlord must maintain and repair in proper working order any hot water service, any other fixture not being a fixture of the tenant, all electrical fittings and wirings and all plumbing and keep the premises weatherproof.

If these are not specifically in the lease, the landlord may not have these obligations at all.

Early access – make sure UPFRONT that you understand how it works and leave nothing to chance!!!!

Unless agreed arrangements are made to permit for it to happen, technically a tenant is not allowed access to the premises until the start date of the lease.  Therefore, if you need access to the premises for fit out or for other purposes prior to the start date of the lease, you must ensure that the landlord will allow that to happen.  If possible, arrangements to allow that to happen should be included in the lease document.

Not only do you need to ensure that you can have access prior to the start date if you need it, but if the landlord has not confirmed the landlord’s acceptance of the signed lease prior to the tenant taking occupation and starting works of any sort, the tenant could have issues if for any reason the landlord then tried to pull out of the deal.  Not likely, but possible.

Tenant contracts with fit out suppliers and otherwise to set up the premises should not be signed until the tenant has a signed lease from the landlord or at least something in writing confirming the landlord’s acceptance of the signed lease from the tenant and that access can be taken.

Please make sure that you understand what they are and that you can supply the landlord’s requirements for access to take place, not just access before the lease starts (which is normally at the very least that the signed leases, certificate of currency of required insurances, security deposit/bank guarantee and payment of the landlord’s lawyer’s costs have all been returned to the landlord’s lawyer).

In doing the insurance, make sure that the landlord’s interest is noted on it and it is in the correct amount.  Any bank guarantee normally must have no end date, be issued by a major bank and describe the secured obligations as “The performance by [insert Tenant’s name] of all of its obligations under its lease of [insert property description].”  Check these things with the landlord/agent before you put them in place.

You should also ensure that

  • all landlord representatives and agents involved in the leasing proposal understand when you plan to take access
  • that they have advised any building manager of the arrangements
  • you have satisfied any of the building manager’s requirements for that to happen (including that all of your building works plans have been approved by landlord and if required, council or a certifier and any required induction has been done)

Do not assume that as soon as you sign the lease you will be given a key.  It is best that you keep all landlord representatives in the loop by email so that they cannot pass responsibility for something not happening.