Description of this module
15 tips for commercial leasing
Often when we see issues arising with commercial leases, it is generally a result of poor documentation, which has usually been in place right from the start of the tenancy.
In this article we highlight some of the key issues we think need consideration by landlords and tenants of commercial premises.
1. Are the parties clearly identified in the lease? This might sound basic, but it is important that all parties to a lease are accurately recorded in the lease document. Failure to do so can lead to questions surrounding the validity of the lease, and the ability to hold parties responsible under that document.
2. Is a guarantee required? What sort or guarantee - a personal guarantee, a bank guarantee, or a rent bond? These will all act to guarantee the tenants obligations, whether they are required will depend upon the leasing situation.
3. Are the premises clearly described in the lease? Is there a plan depicting the area defined as the premises? Are there any car parks included? The importance of accurately describing the premises and any car parks, with cross- references to a plan/s (which need to be included in the lease itself) is key.
4. What is the term of the lease? Landlords will typically like a longer lease, tenants a shorter lease. Are there are rights of renewal of the lease, if so, are these included in the lease document?
5. What do the rent reviews look like? Are they CPI (Consumer Price Index) reviews, market reviews, or fixed raises? If the rent is to be reviewed to “market” rates, does a hard ratchet or a soft ratchet apply? Our suggestion is that a market review needs to be done at least once every 3-5 years. CPI or fixed raises might be acceptable each year, but every few years the rent should be reviewed to market to ensure the rent is in line with current market conditions.
6. Is the business use clearly defined in the Lease? Does it comply with Council or other local authority requirements? Does it comply with the building’s body corporate requirements? Loose or vague business use descriptions can cause issues later in a tenancy. We reinforce to clients the importance of ensuring the business use is accurately defined, and that it is compliant with the requirement of necessary authorities. Bear in mind, as a tenant, that changing the business use “down the track” requires the landlord’s approval.
7. What outgoings is the tenant responsible for? What will the landlord pay? Make sure these are clearly set out in the lease, and that both parties understand them.
8. Are there any works to be completed on the property before the tenant enters the site? Who is paying for the? Clearly identify who is responsible to undertake the works and who will pay for them in the lease, because this will affect the party’s obligations along the way, as well as at the end of the lease with the re-instatement of the premises by the tenant. Consider also whether these works are to be considered for rent review purposes.
9. Are there any incentives being provided by the landlord e.g. a rent-free period, or a contribution to fit out?
10. What are the tenant’s maintenance requirements? How often is the tenant required to paint and redecorate the premises? Or to re-carpet the premises?
11. What rights does the tenant have to assign or sub-let the premises? What about if the tenant wants to assign or sublet the premises to associated parties?
12. What landlord fixtures, fittings and chattels are included in the lease? Are these clearly identified? Are these to be excluded from rent reviews?
13. Make sure a premises condition report is included in the lease at the outset (or get it done as soon as possible upon possession). This is a fundamental document, especially when the lease is coming to an end and the tenant is required to attend to re-instatement of the premises to its original condition. We continually see issues arising with re-instatement, and the lack of an accurate premises description report is a major cause of arguments between landlords and tenants.
14. Does the tenant want or need a first right of refusal to purchase the property should the landlord sell? If so then a clause needs to be included in the lease clarifying this right.
15. Make sure each relevant milestone is documented. Rent reviews, rent renewals, variations and extensions all need to be accurately documented and signed by all parties to the lease.
These are some of the key things you need to consider when thinking about commercial leasing. If you are look at entering into a lease for your business or if you have any questions about your current lease, please contact us.