A commercial lease is a binding agreement between the landlord (owner of the property) and the tenant for the lease of the premises for non-retail use. If you own a commercial premises, it is likely that you will provide the lease document to the tenant. The following discussion is an overview of the important covenants in the lease, particularly clauses landlords should review in a commercial lease. Note that a standard commercial lease does not fall under the protection of retail lease legislation and therefore there are no implied covenants in favour of the tenant.
1. Rent Review
The lease usually contains a provision for the rent to increase on an annual basis. The method of rental increase may be by market rent review, Consumer Price Index or fixed percentage increase. It is important that the procedure for rent review is clearly set out in the lease to avoid any dispute or, in the worst case, the court will deem the rent review void for ambiguity.
If the tenant requires a fit-out of its premises, you should take care that you do not grant early access to the premises before the commencement date until the following:
- The tenant has provided you with some form of security (bank guarantee/ security deposit);
- The tenant has taken out insurance for public risk;
- The tenant gives you the lease document duly executed; and
- You (the landlord) approve the tenant’s plans and drawings of its fit-out works.
The usual minimum insurance requirement is for public risk (current amount of cover is $20 million) and plate glass insurance. You may also consider requiring the tenant to provide you with a copy of its insurance policy on an annual basis to ensure that it complies with this obligation.
As a landlord, you have a right to inspect the premises noting you may only enter the premises during the times and upon providing the relevant notice to the tenant as set out in the lease. It is usual for a landlord to enter the premises for the purpose of carrying out an inspection of the state of repair of the premises. In the event of an emergency, you are not required to give notice. The tenant may try to limit your frequency to inspect the premises.
5. Extension of Term
If the lease term is broken up into an initial term and an option term, you need to consider the timeframe in which the tenant must exercise its option, and if that time frame suits you in terms of sourcing a new tenant in the event the option lease is not taken.
If you own a commercial premises that you intend to lease out, it is essential that you understand both your and your tenant’s obligations under the lease. If you require a lease to be prepared with favorable terms tailored specifically to your requirements, get in touch with our commercial leasing lawyers on 1300 544 755.