A commercial lease agreement is a document that sets out the rights and obligations of the owner of a commercial property (known as the landlord or lessor) and a third party that has agreed to occupy the property (known as the tenant or lessee). There are a number of important points you should look out for when reviewing a commercial lease; they are set out in this article.
1. Anything that should be there
A commercial lease agreement, along with other legal documents, can often be generic and not tailored to the circumstances of the parties.
In negotiating the terms of a commercial lease you may have requested that certain clauses be specifically included given your circumstances. If this is the case then check that they are there!
2. Anything that shouldn’t be there
This is the reverse of point 1 above.
You should read carefully every clause of the lease to ensure that it does not contain any clauses that should not be there (for example, because you have asked for them to be deleted) or that operate in an unusual way for you given your circumstances. It is not unusual for a commercial lease to include clauses that do not apply to you, but that is not as much of a concern as clauses that operate with unintended consequences.
This is particularly important if multiple versions of a document have been circulated and/or if amendments have been made by a number of people.
3. Is the commercial lease agreement for a retail lease?
Each Australian state and territory has legislation dealing with retail leases. This legislation imposes additional obligations on landlords and provides additional rights and protections to tenants who lease retail premises, when compared to non-retail commercial leases.
It is critical to determine at an early stage whether the relevant legislation in your state or territory applies to your premises as it will affect what has to be done before a lease is entered into.
4. Term and options
The term of the commercial lease agreement, whether there is an option to renew the lease and how the option is to be exercised will all be important factors for a landlord and tenant in negotiating a commercial lease agreement.
The landlord will generally prefer a longer initial term (e.g. 5 or 10 years as opposed to 3 years) and longer option periods in order to provide the landlord with greater security of income over a longer period.
However, the tenant may prefer the flexibility of a shorter initial term (e.g. to see if their business becomes successful) in order to minimise their exposure to liability if the business is not successful.
After the initial term, the interests of the landlord and tenant may be aligned and they may wish to secure long term options so they can continue to run their business from the premises.
5. Rent and security
The amount of the rent payable by the tenant to the landlord is critical for both parties. Rent represents the landlord’s return from its ownership of the property and a significant expense for the tenant in operating its business.
The rent for the initial term is specified in the lease. Any rent review (i.e. change in the rent) will also be specified in the lease. The three most common review methods are CPI, fixed and market. The relevant review method is generally applied annually throughout the term of the lease. It is common for CPI or fixed reviews during the term of a lease and for a market review to occur at the expiry of the initial term and each option period.
In addition to rent, the landlord will generally seek security from the tenant to protect the landlord against default of the tenant (e.g. not paying rent). It is common for security to be for an amount equal to 3 to 6 months rent and to be by way of bank guarantee (if the tenant is an individual) or personal guarantee (if the tenant is a company, in which case the company’s directors provide personal guarantees).
The landlord and tenant must be aware of their respective rights to terminate the lease, and more importantly the consequences of termination for both parties.
If a tenant breaches a lease then the tenant (and any guarantor, see 5 above) can be sued by the landlord. The tenant may be sued for the rent that would have been payable had the lease continued until the end of the term (see 4 above), however the landlord is generally required to mitigate (i.e. reduce) its loss by finding a new tenant to replace the former tenant.
It’s important to be very careful when reviewing a commercial lease agreeement. Make sure that you look into the 6 points mentioned in this article, and it’s a good idea to consider working with a lawyer to review the document in more detail. For more help on commercial leases, contact LegalVision on 1300 544 755 and speak to one of our leasing lawyers today.