Co-authored by Chloe Ferreira
A commercial lease is a contract that details the rights and obligations of a tenant and landlord. These provisions include a series of necessary terms that are vital to the contract’s formation and validity.
In the case of a retail lease, be aware that the Retail Leases Act will apply and different terms and provisions for your lease may apply and be required.
So, what are the necessary terms of a commercial lease? The following summary relates to New South Wales and some provisions may not apply or may operate differently in other states.
Parties
All parties should be clearly identified including the landlord, tenant and guarantors (if any).
Premises
The property and/or premises the tenant will occupy during the lease, must be clearly identified. Any fixtures are included in the property, and any common areas should be clearly indicated within the lease. Premises clauses are especially important for co-occupancy or shared spaces where a more specific description is required.
Term
The term defines how long the lease is considered active, illustrated with the commencement and termination dates and the time period – for example, five years. The lease will also indicate if there is any option to renew.
Although there is no legal requirement for a commercial lease to be registered, commercial leases that are greater than three years, including any option periods, must be registered in order to pass an estate to the tenant. Note this is different for a retail lease. A commercial lease for three years or less may be registered.
Rent and rent review
The rental rate should be clearly given. It should specify when the rent should be paid, in what intervals and rent-free periods if any.
Most commercial leases will have a rent review clause detailing how and when the tenant’s rent will typically increase throughout the lease term. This is typically by either a fixed amount, percentage or with reference to the Consumer Price Index, known as CPI.
Alternatively, the landlord may suggest rent is the higher of two different determination methods to protect the landlord primarily from any negative inflation shocks for example “the greater of 3% or CPI.”
Permitted use
This clause outlines what the tenant can and cannot do in using the property they are leasing. It can be fairly specific and could limit the purpose, so it’s important to read the terms carefully. Failure to use the property in accordance with these terms may result in a breach of the lease.
Options to renew
An option to renew the lease will be written into the original lease and can assist in providing security of a long-term location.
Within the option clause it will state the timeframe in which a tenant is required to inform the landlord if they wish to exercise the option and extend the lease. Typically, this is three to six-months prior to the end of the initial term.
If a tenant fails to notify the landlord within the agreed upon time period, the landlord has no obligations to extend the lease. This could result in a new lease having to be negotiated, where various new terms can be added, or the lease then being on a holding over period in which can typically be ended by one month’s notice.
Once a tenant exercises their option, they and the landlord are contractually obligated to proceed with the lease renewal.
Alternatively, the parties may wish to extend by entering a new lease.
Outgoings
Who is responsible for paying outgoings, which ones or in what percentages entirely depends on the lease. Often, the tenant can be required to pay rates and taxes but there is no fixed rule.
Insurance premiums are dealt with separately in the lease.
Bank guarantee / security bond
Often, the tenant will have to provide a security for the lease. This could be in the form of a cash bond, or a bank guarantee.
Subletting and assignment
The lease may or may not allow the tenant to sublease or assign the lease. It is usually subject to the landlord’s consent.
A sublease allows the tenant under the original lease (headlease) to lease part or all of the property to another third party.
Assignment of a lease differs, as the original tenant is required to transfer the lease to another tenant. The landlord may still require the original tenant to maintain liability for the term of lease in which assignment is made.
For either a sublease or assignment, the lease may specify the landlord’s consent is required. In certain circumstances consent is at the absolute discretion of the landlord. In others, consent may not be unreasonably withheld. Where consent is not to be unreasonably withheld, the landlord shouldn’t refuse the assignment or subletting if the new tenant is clearly able to perform the lease and meet their obligations.
Repair and maintenance
The requirements for both parties concerning any repairs and maintenance should be set out in the lease. Typically, any repairs and maintenance are the responsibility of the tenant unless they are structural.
Insurances
To mitigate and protect themselves from risk, the lease might require the tenant to have insurance such as property and liability insurance and plate glass insurance. These will be set out in the lease and may be negotiable with the landlord.
Make good clause
In essence, a make good clause requires that at the end of the lease, the property is returned in the original condition it was found in, regardless of any changes that have been made. The specifics of this type of clause are negotiable and may vary between different leases.
Does your lease have all the essential terms?
Leaving the terms ambiguous to allow the parties to decide on essential terms after the lease is executed isn’t advisable and may not be enforceable.
If you have any questions or require assistance with any of your leasing needs, please contact Coleman Greig’s Property team.
