As a tenant, entering into a commercial lease can be daunting. As the landlord drafts the lease, you run the risk of your lease containing clauses that are unfair or disadvantageous towards you. While various state-based laws protect retail lease tenants, commercial tenants are not afforded this protection. This means that you should make sure that you are happy with your lease before you sign. This article sets out five clauses that you should look out for in your lease. 

1. Ratchet Clause

A ratchet clause prevents rent from decreasing when it is subject to a rent review. Ratchet clauses are most commonly found concerning market rent reviews, where the rent could technically decrease according to certain market conditions. A ratchet clause might state that the rent ‘can not be less than that of the previous lease year’. 

These clauses are unfair. If your lease contains one, you should attempt to remove it. Retail lease laws generally render these clauses unenforceable in retail leases.  

2. Clawback Clause

A landlord might include a clawback clause if they have given you an incentive, such as a:

  • rent deduction; or
  • lump sum contribution towards your fitout. 

A clawback clause comes into effect if you default or terminate the lease early. Under the clause, you must pay back all or part of the incentive to the landlord. Clawback clauses often have a repayment schedule or will be set in proportion to the remainder of the term of the lease. 

Landlords consider these clauses necessary to protect their investment in you as a tenant. However, courts consider these clauses to be ‘penalty clauses’, meaning that they force you to pay a fine rather than a genuine estimation of any damage to the landlord. Therefore, any clawback clauses should be removed from your lease.

3. Indemnities

Most leases will contain an ‘indemnity and release’ clause, which states that you release the landlord from any legal claims or responsibility relating to the lease. Importantly, not all leases will include an exception for the landlord’s acts or negligence. This means that you will not be able to hold the landlord legally responsible for any claims which arise due to the landlord’s actions.

To remain fair, indemnity clauses in leases should exclude any acts or negligence caused by the landlord.

4. Redecoration

While most tenants know of the obligation to make good the premises at the end of the lease, some are not aware that they may have an additional obligation to redecorate the premises. Redecoration clauses are often slipped in amongst the clauses regarding repair and maintenance. Most commonly, a redecoration clause will require the tenant to repaint the premises. Often, the clause will state that you must do this at a specific time as well as at the landlord’s discretion. 

For example, you may need to repaint ‘at the end of three years and as required by the landlord’. If the term is six years long, this means that redecoration will be required at least twice.

It is your choice as the tenant whether this is a clause you feel like you can comply with. Where redecoration coincides with make good, the issue is not as significant. However, it would not make sense to include redecoration a year before the end of your lease if you will be making good the premises in a year anyway. In cases like this, the clause should be removed.

5. Bank Guarantee Obligations

Most leases will require a security of some sort. This often takes the form of a bank guarantee. Whilst there is nothing wrong with the requirement to provide a bank guarantee, this type of guarantee is usually quantified as equivalent to a certain amount, such as ‘equivalent to 3 months’ rent and outgoings’. As rent is typically subject to a rent review each year, many leases will slip in a requirement that you provide a replacement or additional bank guarantee each year when the rent increases.

Although a bank guarantee will not require you to provide your own money to the landlord, it will require a trip to the bank. Having to obtain a new bank guarantee each year can be a time-consuming exercise. Further, if the clause requires you to provide a new guarantee on the day the rent is reviewed, you risk breaching your lease if there are delays in obtaining the bank guarantee. It may be difficult to persuade your landlord to amend this clause.

Key Takeaways

Leases often contain hidden clauses that may be inconvenient or unfair for you as the tenant. Before signing a new lease, you should take the time to have it carefully reviewed and make any changes necessary. If you need help identifying any problematic clauses in your lease, contact LegalVision’s leasing lawyers on 1300 544 755 or fill out the form on this page.

About LegalVision: LegalVision is a tech-driven, full-service commercial law firm that uses technology to deliver a faster, better quality and more cost-effective client experience.

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Lianne Tan
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