In Short
- Rent Review & Security: Leases often include annual rent reviews, with tenant security provided through bonds or guarantees.
- Fitout & Insurance: Ensure fit-out conditions, insurance proof, and compliance are met before tenant access.
- Inspection & Extension: Landlords can inspect the premises and must consider option terms for lease extension.
Tips for Businesses
Ensure key lease clauses are clear to protect your interests. Review rent increases, tenant security, insurance requirements, and fit-out conditions. Conduct regular inspections and monitor lease extension terms to maintain a strong landlord-tenant relationship. Legal advice is recommended for tailored lease agreements.
A commercial lease is a binding agreement between the landlord (property owner) and the tenant to lease the premises for non-retail use. As a commercial property owner, you will likely provide the lease document to the tenant. This article outlines the key covenants in the lease, focusing on the clauses landlords should review in a commercial lease.
1. Rent Review
The lease usually contains a provision for the rent to increase annually. The method of rent review may be:
- by a fixed percentage (such as 3% or 4%);
- by the consumer price index (CPI) with reference to the inflation rate; or
- according to a market rent review.
2. Security
When you grant a commercial lease to a tenant, require them to provide security through a cash bond or bank guarantee, along with personal guarantees. The lease agreement typically specifies the requirements for a cash bond or bank guarantee. A cash bond is a lump sum deposited into the landlord’s or real estate agent’s nominated account, while a bank guarantee is issued by a bank or financial institution.
Obtaining security under the lease offers several benefits. It protects against potential losses, such as unpaid rent, repair costs, or legal fees, if the tenant fails to meet their lease obligations or vacates early.
Continue reading this article below the form3. Fitout
If the tenant requires a fit-out of its premises, you should not grant them early access to the premises before the commencement date until:
- the tenant has provided you with some form of security;
- the tenant has taken out insurance for public risk and plate glass;
- the tenant provides you the lease document duly executed; and
- you approve the tenant’s plans and drawings of its fit-out works.
4. Insurance
Your tenant should have public risk and plate glass insurance at a minimum. Additional insurance may be necessary based on the following:
- the tenant’s business size;
- the premises’ replacement costs; and
- potential liabilities, such as fire, business interruption, or environmental risks.
You must ensure that the tenant provides proof of insurance before they gain access to the premises. Confirm with your insurers that the coverage is adequate. You may also require the tenant to submit a copy of their insurance policy annually to verify ongoing compliance with this obligation.
5. Inspection
As a landlord, you have the right to inspect the premises but must follow the lease terms regarding timing and notice to the tenant. Typically, landlords conduct inspections to assess the state of repair of the premises. In emergencies, you can enter without providing notice. Be aware that tenants might try to limit how often you can inspect the property.
6. Extension of Term
If the lease includes an initial term followed by an option term, consider the timeframe for the tenant to exercise their option. Additionally, think about whether it aligns with your plans for finding a new tenant if the option is not exercised. Typically, tenants must exercise the option between six and three months before the lease expires.
Key Takeaways
Reviewing key clauses in a commercial lease helps you protect your interests and maintain clear agreements with tenants. Understanding rent reviews, security, fit-out conditions, insurance, inspections, and extension terms can help you better manage risks and ensure compliance. Careful negotiation and legal guidance will also help you establish a strong foundation for successful leasing.
If you require a lease prepared with favourable terms tailored specifically to your requirements, our experienced leasing lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today at 1300 544 755 or visit our membership page.
Frequently Asked Questions
Rent reviews may occur annually through fixed percentages, CPI (inflation rate), or market rent reviews.
Tenants typically provide security via a cash bond, bank guarantee, and personal guarantees.
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