What Deal Breaker Clauses Should Tenants Be Aware of in Leases?

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Table of Contents

• Indemnities
• Relocation and Demolition clauses
• Liabilities
• Key Takeaways

Entering into a lease is an important decision, and you should give due consideration to the terms of a lease prior to entering into it. A lease is a contract that grants one party (the tenant) the rights to occupy a commercial property owned by another party (the landlord). Notably, a lease is a contract for a fixed term, and unlike other contracts, you generally cannot terminate a lease early. As such, it is essential that, as a tenant, you are aware of some deal breaker clauses you should look out for in a lease.

Indemnities

An indemnity is a clause where a party makes a promise to another party to hold them harmless against certain losses or damages they may suffer. In a lease, indemnity clauses will generally require the tenant to indemnify the landlord against actions, liabilities, penalties, and claims involving the commercial premises.

While indemnity clauses are standard within leases, it is essential to carefully review the indemnities to ensure they are not unreasonable. As a tenant, the landlord should not require you to indemnify them against anything that the landlord’s wrongful acts, omissions or negligence may have caused or contributed to. 

You should consult with your insurance broker to ensure that your insurance policy covers your indemnity in your lease agreement.

Relocation and Demolition clauses

Relocation and demolition clauses within a lease allow a landlord to relocate you or demolish the premises with notice. If your lease is a retail lease, the Retail Leases Act will offer some protection in relation to the landlord’s rights to relocate and demolish your premises.

1. Relocation

If your lease contains a relocation clause, you should ensure that:

• the landlord must genuinely require you to relocate due to redevelopment works or similar that cannot occur without vacant possession of your premises;
• the landlord must provide you sufficient notice of such proposed relocation;
• the landlord should offer you alternative comparable premises on terms the same as your current lease;
• you should be provided the option to terminate the lease if you do not wish to relocate to the alternative premises; and
• the landlord should pay you reasonable costs of the relocation.

2. Demolition

If your lease contains a demolition clause, you should ensure that:

• the landlord should provide a genuine proposal to conduct a demolition;
• the landlord will conduct the demolition within a reasonable time after the proposed termination of your lease (i.e. the landlord should not be allowed to terminate your lease in six months for demolition that will not occur until twelve months after the termination date);
• the landlord provides you reasonable notice of such a proposed demolition; and
• you are provided reasonable compensation for the termination of the lease due to demolition.

As a tenant, it is often a deal breaker if a landlord includes any relocation and demolition clauses in your lease, and you may seek to remove these clauses in their entirety. However, landlords will often require these clauses. In this case, you should ensure these clauses are carefully reviewed to ensure that they are reasonable. 

Liabilities

Liability clauses within a lease seek to limit a party’s liability. Leases will generally contain clauses that limit the landlord’s liability in relation to the compensation payable to the tenant where a landlord fails to comply with their obligations pursuant to a lease. 

Liability clauses within a lease can be a deal breaker. A lawyer should review them as they have the effect of essentially limiting the compensation you may be entitled to should the landlord fail to comply with their obligations. Practically, the effect of limitation of liability clauses is that if you suffer losses due to the fault of the landlord, you may not be able to recover these losses and be limited to nominal compensation for these losses.

How to End a Lease Factsheet

A factsheet that sets out the three ways to end a commercial lease in Australia: surrendering your lease, assigning it or subletting it.

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Key Takeaways

Many clauses within a lease may practically affect your rights pursuant to the lease. As a tenant, your best position is that your lease does not contain these clauses. However, the commercial reality is such clauses are standard in leasing. You must seek legal advice in relation to your lease to ensure that these clauses, insofar as is practical, are reasonable. 

If you have any questions about a deal breaker clause in your commercial lease, our experienced leasing lawyers can assist you 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 on 1300 544 755 or visit our membership page.