What are the Legal Elements of a Retail or Commercial Lease?

In Short

• A commercial lease is only legally valid if it includes a clear premises description, exclusive possession, and a definitive term.
• Rent must be agreed upon and explicitly stated; otherwise, the lease may be unenforceable.
• Lease agreements should clearly outline termination and renewal terms, including notice periods and any penalties.

Tips for Businesses

Before signing a lease, confirm that all essential terms are clearly defined, including the premises, lease duration, and rent. Ensure you understand the landlord’s responsibilities and your rights regarding exclusive possession. If anything is unclear, seek legal advice to avoid disputes or unexpected costs later.

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Table of Contents

• Exclusive Possession
• The Premises
• Definitive Term
• Rent
• Landlord’s Responsibilities
• Lease Termination and Renewal
• Key Takeaways
• Frequently Asked Questions

When you think about a retail or commercial lease, you may imagine the:

• paperwork that a landlord gives a tenant; or  
• right to use and occupy premises for running a business, such as a retail shop or commercial office.

However, a lease or a “leasehold interest” will only be created legally if a landlord gives a tenant the right to possess the premises exclusively for a certain term. Essentially, this means that a lease could be invalid and unenforceable without these three legal elements:

1. clear description of the premises;
2. exclusive possession; and
3. a definitive term;

This article provides a detailed explanation of each of the legal elements of a lease.

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Exclusive Possession

Exclusive possession means that you, as the tenant, have the right to exclude all other people from the premises you are leasing. This right allows you to exclude the landlord from the premises, except where the landlord is legally entitled to enter.

Examples of situations where the landlord has the right to enter the premises, despite your right to exclusive possession, include entering to:

• view the condition of the premises;
• repair the premises; or
• terminate the lease because you fail to pay rent or breach of another obligation in the lease.

The Premises

Because you have the right to possess the premises exclusively, it is essential that the lease clearly describes what is included in, or excluded from, the premises. The premises are usually described in one or more of the following ways:

• as the entire building, floor of a building or room. For  example, “Ground Floor of Building X located at 1 Example St, Sydney NSW 2000”;
• as a shop or kiosk in a shopping centre. For example, “Shop 1 in Example Shopping Centre”;
• according to the folio identifier of the land. For example, “Lot 1 in Deposited Plan 000001”;
• by attaching plans of the premises to the lease; or
• by referencing any other inclusions such as storage areas or car parking spaces.

Definitive Term

A lease must have a certain term to be valid and enforceable. Having a specific term means that the commencement date of the lease is clear and properly defined. It is not enough for the lease to commence “within a reasonable time of signing the lease”. The following are examples of where an actual commencement date can be determined:

• “1 January 2019”;
• “seven days from the completion of the landlord’s fit-out works”; or
• “two days from the date the development approval from the premises is granted”.

If there is no date in your lease, your actions and intentions and those of the landlord may imply the commencement date. For example, if you start occupying the premises and paying rent, this may suggest that the commencement date of the lease was the date you took exclusive possession.

The circumstances may also show that you and the landlord intended for the lease to commence when a specific event occurred, such as when the:

• existing tenant moves out of the premises;
• construction of the building is completed; or
• all of the parties sign the lease.

The duration of the lease must also be clear and properly defined. In most cases, the duration is expressed by a number of months or years from the commencement date of the lease and any option to renew the lease for a further term.

Rent

It is likely that you will have to pay rent to the landlord in exchange for your right to use and occupy the premises.

However, if you and the landlord agree that rent should be paid, you should ensure you explicitly agree to the amount. If you have not agreed to an actual amount, this may mean that the lease is invalid.

Landlord’s Responsibilities

While much of the focus in a lease agreement is on your obligations, it is essential to highlight the responsibilities of the landlord as well. Beyond providing the premises and ensuring their suitability for use, setting what has been agreed upon with respect to the landlord’s obligations is essential. This includes:

• maintenance;
• repairs; and 
• compliance with building codes and regulations.

Also, landlords may be required to provide specific amenities or services outlined in the lease agreement. By understanding the landlord’s responsibilities, you can better assess the overall suitability of the premises. You can also anticipate any potential issues or disputes that may arise during the lease term.

Lease Termination and Renewal

Another critical legal element of a commercial lease is the provisions related to lease termination and renewal. These terms outline the conditions under which either party can terminate the lease agreement before the specified term expires. They also outline any options for renewal or extension. Lease termination clauses typically specify:

• the required notice period;
• conditions for early termination; and 
• any penalties or consequences for breach of contract. 

Conversely, renewal clauses detail the process for extending the lease beyond the initial term, including:

• notice requirements;
• rent adjustments; and 
• any changes to terms or conditions. 

By clarifying these provisions, both parties can minimise uncertainty and potential disputes. You can then foster a more stable and productive landlord-tenant relationship.

Key Takeaways

A lease will only be created legally if a landlord gives you the right to possess the premises for a certain term exclusively. For this reason, it is essential to ensure that:

• the premises you are renting is clearly defined;
• you can exclude others from the premises, including the landlord;
• commencement date and duration of the lease are clearly defined; and
• the amount of rent you are paying is agreed.

If the above legal elements are missing, your lease could be invalid and unenforceable. 

If you have any questions, our experienced leasing lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 1300 544 755 or visit our membership page. 

Frequently Asked Questions