Leasing premises is a major investment decision, whether you are a landlord or tenant.
What many people don’t understand, however, is how complex a commercial lease can be and how it can be fraught with potential problems. Whilst many people have signed residential leases in adult life and found the process to be fairly simple and easy to understand, a commercial lease has many and far-reaching implications, not the least of which is the prospect of losing a business should something go wrong!
This Plain English Guide highlights some of the issues facing both tenants and landlords in a commercial leasing situation and what should be considered when negotiating a lease agreement.
Specific Issues for the Landlord to Consider
As a landlord, there are a number of issues you need to consider. Firstly, and most importantly, you need to ensure that the lease documentation meets your needs. You must also understand how the lease is to operate and what your rights are. A good lawyer will be able to adapt any special needs or requirements you may have into the lease documentation and explain it to you in plain English so that you are clear about what it all means.
Whilst drawing up the lease, you and/or your lawyer will need to consult parties such as your financier (if there is a mortgage over the property), your architect or builder if building works may be required and your property manager or agent. This will ensure that the commercial terms incorporated into the documentation are appropriate.
Secondly, you should endeavour to find a tenant that you are comfortable with and who you are confident will be able to pay the rent and leave the premises in a satisfactory condition.
Other considerations you will need to take into account include:
- Obtaining appropriate security on the lease
- For example, you may wish to obtain personal guarantees from the directors or shareholders of the company leasing the premises in the event that the company fails to meet its obligations under the lease. Another alternative is to request a bank guarantee or cash deposit, usually to the value of three months rent.
- Who is responsible for the fit-out of the premises and who will own the fit-out at the end of the lease, as well as who is responsible for refurbishing the premises at the end of the lease.
- What is the tenant planning to do in the premises, and will this affect the structure of your building.
- Obtaining the consent of your mortgagee for the lease. Most commercial leases exceed three years (including options to renew) and in NSW this means that they need to be registered with the Land Titles Office. Registration cannot take place without the consent of the mortgagee.
- What is required of you, as a landlord, in terms of maintenance and access of common areas, lobbies, lifts, toilets etc. Whether any strata levies apply and what the rules of the building are etc.
Specific Issues for the Tenant to Consider
When you consider that one of your most important business assets is your lease, as a tenant it becomes critical that you understand the implications of a lease and your rights and obligations.
In fact, your premises are the most tangible component of your business and your goodwill is affected by your location, so why risk losing it all over a lease dispute? Expert legal advice will ensure that your needs and your rights are taken into account during a lease negotiation. Not only will it enhance your business opportunities, but in the event that you choose to sell your business, a sound and secure lease is vitally important and could make or break the deal.
When you have found the right premises, in the right location for your business, some of the specific issues you need to consider when negotiating the lease include:
- Whether there are specific disclosure requirements
- Whether you can gain the relevant licences (eg liquor licence) and the relevant approvals from Council to run your business within the premises
- Whether the specific legislation might apply to your particular premises eg. retail leasing legislation, Heritage legislation
- What warranties you are able to secure from the landlord regarding damage to the building etc and whether you are covered in case of the need for relocation or demolition of the building
- How, and when, the rent will be reviewed and what your responsibilities are in terms of outgoings
- What is the term of the lease and when are you able to exercise any options for renewal – you will also need to carefully diarise reminders to ensure that you meet the relevant requirements for exercising these options.
General Items for Negotiation in a Commercial Lease
Most commercial leases will take into account the following “items” that should be negotiated between the landlord and tenant (lessor and lessee) and incorporated into the 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 renewal and how/when to exercise the option
- Maintenance – landlord is generally responsible for structural repairs and tenant for day to day maintenance 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
- Obligations of each party at the end of the lease
Retail Leasing – Special Considerations
In fact, retail leases are treated quite differently to other commercial leases and are covered by a set of unique rules. Whether you are a landlord or tenant entering into a retail lease, you will need advice from a legal expert to ensure that your rights and obligations are adequately taken care of. The Retail Leases Act in NSW can be complex and requires expert interpretation – ignorance can lead to significant penalties.
Some of the most important aspects of the Act affecting retail leases include:
- The definition of, and what constitutes, a “retail” business.
- Obligations for lessors and agents to disclose and provide information to lessees quickly when entering into negotiation of a lease and also during the term of the lease.
- Provisions under the Act for fit-outs and how costs are dealt with between lessor and lessee.
- Restrictions regarding the advertising of available retail space to new tenants, unless the lessor has specifically offered a renewal or extension to the existing lessee which has been refused.
- The security bond system requires payment of a bond to the Retail Tenancy Unit for investment and management.
- There is a section of the Act written to deal with misleading or deceptive conduct by either party to a retail lease.
- Independent retail valuers are used to determine rent reviews in the event that both parties cannot agree on the actual rent.
- Detail is required from lessors in the disclosure statement relating to “disturbances” which might interfere with the lessee’s operations if they are to avoid liability.
Retail landlords and tenants should be aware of these aspects of the Act. Enlisting expert legal advice can save money, time and potential heartache over contract negotiations.
How Coleman Greig Can Help You
Over the years, the commercial leasing team at Coleman Greig has assisted many clients in relation to clarifying and negotiating commercial, industrial and retail leases.
We can assist you with:
- Drafting lease agreements
- Negotiating lease agreements
- Assigning, varying or surrendering your lease
- Taking on an assignment of lease
- Enforcing the terms and conditions of your lease
- Any disputes you may have with your landlord or tenant
For more information on how our property leasing lawyers can help you with your leasing arrangements, please contact our team.