Is Your Lease in Good Shape?   

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Table of Contents

• Check Your Permitted Use is Still Relevant
• Have Your Outgoings Been Passed on Correctly?
• What is the Rental Review Regime in Your Lease?
• Have you Diarised Your Lease Option Dates?

If you are the tenant of a commercial or retail lease, it is worth revisiting the key aspects from time to time to ensure that your lease is continuing to work in your favour. Below is a quick guide of things you should check periodically throughout the term of your lease to ensure it remains in good shape. It is worth doing so to ensure you are compliant and not paying extra money to your landlord.

Check Your Permitted Use is Still Relevant

The lease specifies permitted use and is the use which you, as the tenant, will put the property to. For example, if you tenancy initially started as a coffee shop, your lease may state that the permitted use is “Café”.  However, if you have added retail sales to your business as a combined café/ book and gift shop during your lease, it may be necessary to vary the permitted use to “Café and retail sales” to ensure your use of the premises is compliant.

It is critical that you do this and that the landlord consents to the change. If you do not comply with the permitted use (or vary it by agreement where it has changed) you may be in breach of your lease and trigger a termination clause.

Have Your Outgoings Been Passed on Correctly?

Some tenants pay outgoings (or operating costs of premises) on top of their monthly rental payments.  Examples of outgoings include land tax, rates, water usage, cleaning costs and the like. Most leases contain provisions as to statements of outgoings and procedures for any adjustments each year after the issuing of statements. Ensure you are familiar with these clauses and that the landlord has followed them. It is worthwhile to request copies of all invoices for outgoings and details of the way they have been calculated to check that you have been paying the correct amounts. Small errors over the course of a long-term lease can add up to quite a difference, particularly if you are paying the landlord more than you should be.

Note that there are additional disclosure requirements regarding outgoings for retail premises with which your landlord should comply.

What is the Rental Review Regime in Your Lease?

It is crucial that you are well versed in how your rent will increase during the term. Most leases have one of the following mechanisms inserted to deal with rental increases:

1. Increase by Consumer Price Index (CPI);
2. Increase by Fixed percentage (for example, 5%); or
3. Review to market rent.

On the anniversary of the lease commencement date, commonly one of the above three mechanisms will apply to increase your rent incrementally. In practical terms, you should be aware of how and when your rent will increase. Once it does, check that it has been calculated and applied correctly to ensure that you are not paying more rent to the landlord than you are legally required to under your commercial or retail lease.

Have you Diarised Your Lease Option Dates?

Does your lease have an option (or options) for renewal? If so, it is necessary to note down the dates of:

• The option (or options); and
• The dates which you must exercise these.

You may lose your right to exercise the option if it’s not validly exercised, and find yourself and your business out on the street looking for new premises. Ensure you understand the option clauses and diarise the dates that you must exercise the option by.  Usually, this can be anywhere between three to nine months before the end of the lease’s term.

Once an option is exercised, the rent will be determined by way of market review – so ensure this is undertaken correctly. Leases should contain a detailed procedure for a review to market, including a dispute or “break” provision for the instruction of an expert valuer to determine the rental value with both parties to share the price of the valuer.

Also, ensure that there is not a “ratchet” provision in the lease which will prevent the rent falling below its current level upon any review to market.

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If you are the tenant in a retail or commercial premises, it may be worthwhile submitting your lease for a “health check” by one of our commercial leasing lawyers. Questions? Get in touch on 1300 544 755.