Commercial leases are binding agreements that set out obligations between business owners (tenants) and owners of leased property (landlords), allowing the tenant to occupy the leased property (premises). Commercial tenant rights are the terms and clauses of a commercial lease that pertain to the tenant. It is critical that before entering into a lease, a tenant reviews the agreement for certain terms which may affect them. This article unpacks the five key clauses you need to consider as a tenant when negotiating your commercial lease.
1. Lease Duration and Extension of Term
The lease duration is the length of time you are allowed to remain on the premises. It is important to review this particular term in your agreement to ensure it is suitable for your needs.
Once your lease has expired, the landlord will be under no obligation to renew it, and you will, therefore, need to find alternative premises. You might consider including a notice term should your lease have no chance of renewal.
There is no “one size fits all” approach to a lease duration – it mainly comes down to business planning.
For example, it is common for early-stage businesses only to require a short-term lease as they may wish to move on to larger premises after its expiration. Similarly, other tenants may need a longer lease with fixed option periods to ensure their tenancy is secure.
2. Rent, Outgoings and Review
As a prospective Tenant, it is important you are clear on the following:
- The starting rent for the premises;
- The outgoings and any other fees payable on top of the rent;
- The way in which the rent will increase upon review (rent review);
- When the rent review is due to take place;
- The method that will be used for rent review (i.e. is it a review by way of a Consumer Price Index (CPI) or fixed percentage or will it be a review to market); and
- The method of payment as well as dates for rent, outgoings and any other payments under the lease.
Most leases include clauses that will address when a landlord will review and increase the rent. Usually, a rent review will take place annually on the anniversary of the lease, using the method specified in the lease. It is prudent to seek legal advice on rental provisions and if possible, negotiate a rent reduction.
The majority of commercial leases impose insurance requirements on tenants, such as:
- Public liability;
- Worker’s compensation; and
- Plate glass.
The tenant will be required to take out an insurance policy and provide the landlord with a certificate of currency of insurance. Insurance is an important consideration in commercial agreements. A breach of an insurance provision could mean a violation of the lease and result in the landlord being able to re-enter and take possession of the premises.
4. Inspection When Reviewing a Commercial Lease
As a lessee, you will want to enjoy exclusive possession and use of the property. You will have a right implied under the common law to “quiet enjoyment” of the property. This quiet enjoyment will be subject to the terms of the lease and any rights expressly reserved by the landlord.
However, the landlord will not be able to interfere substantially with your use and enjoyment, provided you observe the terms of the agreement and your obligations under the lease. Accordingly, any inspection clause in the lease should be limited to certain situations and be subject to reasonable notice at reasonable times.
5. Heads of Agreement
Once the parties’ complete negotiations of the commercial terms of the lease, the first step is to enter into a “heads of agreement” (otherwise known as an “offer to lease”).
It is crucial this document accurately captures all commercial terms agreed between the landlord and tenant. It should also be specified as “non-binding” until the lease has been prepared, reviewed and signed to protect the parties.
The basis of your commercial tenant rights will subsist within the heads of agreement, lease and any other ancillary documents. It is important to review these to ensure that your rights are protected as a tenant.
In signing a commercial lease, you are signing up to a binding agreement between you and your landlord. It is essential your commercial lease is clear and reflects your needs. A clear and concise lease, setting out all matters agreed upon, will minimise risk or any unwelcomed surprises. This will help avoid future liabilities or dispute issues between you and the landlord. Lastly, it is always prudent to obtain legal advice before you commit to a long term contract such as a lease.
Questions? Get in touch with our commercial leasing lawyers on 1300 544 755.