In Short
- Ensure the permitted use in your lease aligns with your business to avoid breaching the agreement.
- Understand your rent, outgoings and repair obligations, including maintenance and possible refurbishment costs.
- Keep track of lease terms and renewal deadlines to avoid unexpected tenancy issues, especially if you plan to assign or sublet.
Tips for Businesses
Check your lease carefully before signing to avoid unexpected costs or restrictions. Make sure the permitted use is broad enough for your needs. Stay on top of rent, outgoings and maintenance obligations. If you plan to assign or sublet, confirm the landlord’s approval process and whether you will be covering any associated costs.
Entering into a commercial lease can be quite a daunting and tasking process. However, with the right knowledge of key terms, you can easily remain compliant with your lease agreement. This article outlines key terms in lease agreements, their importance for your business operations and practical tips to follow.
Permitted Use
The permitted use of the premises is one of the most important considerations that you must make note of prior to entering into the lease. Before the lease is signed, you should ensure that the permitted use correctly corresponds to how you will be using the premises If you use the premises for anything other than the listed permitted use, you may be in breach of the lease.
For example, a business carrying on a warehousing and distribution business may want to have their permitted use listed as ‘commercial office and warehouse.’ You should ensure that the permitted use term is quite broad so that if you need to assign the lease, the premises can be easily passed on to another tenant.
Rent and Outgoings
You will want to ensure you know your rental responsibilities and when payment is due for both the rental and outgoing figures. Most commonly, landlords suggest that the rental amount is payable on the first day of the month; however, this can vary. The rental figure will be negotiated between you and the landlord prior to the lease documents being issued for negotiation.
Additionally, depending on whether the lease is a gross lease, you may be required to pay for any outgoings relating to the premises. These charges may include:
- any service charges provided to the premises;
- security costs;
- maintenance costs; and
- other charges connected to the premises.
A factsheet that sets out the three ways to end a commercial lease in Australia: surrendering your lease, assigning it or subletting it.
Maintenance and Repairs
You should also be aware of the maintenance and repair conditions of the premises. Most premises will require you to ensure that it is kept clean and tidy, subject to fair wear and tear. Additionally, any damage that is caused to the premises will need to be fixed. The landlord may also require you to repaint, refloor or re-carpet the property when leaving the premises or every three to five years. The lease will often contain details about the standard required when refurbishing the premises every five years.
Lease Term and Option Period
The lease will set out the term that you must be at the premises for and any extensions to that period, or ‘options’. It is important that you diarise the end of the lease term so that you can prepare to hand the premises back over to the landlord and remove any chattels.
It is also extremely important that you understand when you need to exercise your option to renew during the current lease term. Typically, landlords will require you to provide notice of your intention to renew the lease for the further option period provided between 3 to 12 months in advance. This period will vary depending on the lease, but it is important that you provide your landlord with notice during this window. Otherwise, if it is provided too late, they are at liberty to reject the renewal and either:
- end the tenancy; or
- if the lease allows, convert you to a monthly tenancy.
Assignment and Subletting Rights
Should you wish to assign, franchise, sublet or otherwise grant a licence as part of the lease, most leases will require you to obtain the landlord’s approval before any agreements can take effect.
The items that you are likely to provide to the landlord prior to getting approval may include information regarding the incoming assignee’s:
- financial standing;
- permitted use;
- business standing; and
- reputation.
You will likely need to cover the costs of assigning the lease, as well as any expenses the landlord incurs in obtaining necessary approvals for the premises. However, depending on your agreement with the incoming tenant, you may be able to pass these costs on. This will depend on the terms you negotiate.
Key Takeaways
A commercial lease sets out key terms that impact your business operations. Ensure the permitted use aligns with your business to avoid breaching the lease. Additionally, it is crucial to understand your rent and outgoing obligations, including service charges and maintenance costs. Be aware of repair and refurbishment requirements, including repainting or replacing flooring. Keep track of lease terms and renewal deadlines to avoid losing your tenancy. If you plan to assign or sublet the lease, you will usually require landlord approval, and you may be responsible for associated costs. Reviewing these terms carefully can help you avoid unexpected obligations and expenses.
If you need help understanding commercial lease agreements, 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 on 1300 544 755 or visit our membership page.
Frequently Asked Questions
If you use the premises for anything outside the permitted use stated in the lease, you could be in breach of the agreement. This may give the landlord the right to terminate the lease or take legal action. It is best to ensure the permitted use is broad enough to cover your business activities.
Yes, but most leases require the landlord’s approval before you can assign or sublet the premises. You may need to provide details about the new tenant’s financial standing and business reputation. You will also likely cover the costs of assigning the lease, though you may be able to pass these on depending on your agreement.
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