Commercial leases are leases for premises that a business owner will use for a commercial purpose. Such spaces can include warehouses, instructional sites or an office in a commercial building. A commercial lease differs from a retail lease in that it does not fall under the same state-based retail legislation. Apart from general commercial and legal requirements, there are no specific obligations that parties to a commercial lease must follow. For this reason, it is particularly important to ensure that both the landlord and tenant understand the terms and conditions of the lease.
Leasing Commercial Premises
A commercial lease is a document stating the rights and obligations of the owner of the commercial property (known as a landlord or lessor) and a third party that has agreed to occupy the property (known as a tenant or lessee). The tenant/lessee will pay rent in exchange for the right to quiet enjoyment of the property with exclusive possession.
Negotiating a Commercial Lease
Before entering a commercial lease, you have an opportunity to negotiate its terms. At the negotiation stage, it is beneficial to engage a qualified leasing lawyer who can advise you about the contract and help you during negotiations. You want to ensure the contract is fit for purpose, protects your interests and does not impose oppressive terms.
The types of rights and obligations that are common to a commercial lease include:
- signage;
- premises fit out;
- common areas usage; and
- building rules, amongst others.
You should note what the lease says about your rights and obligations, then consider if you need to make any changes to accommodate your particular requirements and needs in your use of the property. Again, it is best practice to have a lawyer review your lease and advise on any unfair provisions. That way, you and your lawyer can negotiate with the other side and reach a fairer, mutually agreed position.
Key Terms in Lease Negotiations
Preliminary Documentation
Before receiving the commercial lease itself, you will often receive a Heads of Agreement (HOA) or similar document. A HOA will not be binding but will specify some details of the arrangement before the parties draft and sign the final lease agreement. At this stage, it is important that you negotiate and agree to commercial terms you are comfortable with, as this will inform the actual lease document (which is binding).
Fixtures and Fit-Out
Before you sign a lease agreement, it is best practice to conduct a condition report on the property. Primarily, this report is important for two reasons:
- First, if there is an issue with the property, for example, the air-conditioning does not work, you could raise this with the landlord and subsequently include a condition within the lease that the landlord must rectify the air-conditioning; and
- Secondly, at the end of your lease, there is often a requirement to ‘make good’ on the property. This commonly involves returning the property to its condition at the commencement date (excluding fair wear and tear). Having a condition report of the property’s condition (including its fixtures and fit-outs) will reduce the likelihood of a dispute arising. For instance, if something was already broken before you entered the lease, you can refer back to the condition report to assert that you did not cause the damage.
Ultimately, completing a condition report can save you time and money in disputes both during the term of the lease and at its expiration.
Costs
Further to the ongoing cost of rent under a commercial lease, there are often several additional costs you need to incur throughout the lease term, including:
- security bond;
- outgoings;
- insurance costs;
- legal costs;
- refurbishments;
- repairs and maintenance; and
- make good.
It is important you are aware of all the costs involved in your commercial lease before signing it. This is particularly important because commercial leases do have regulations in the same way as retail leases. Due to fewer regulations or disclosure requirements, the terms of your lease agreement will be the paramount document outlining each party’s rights and obligations.
Assignment of Lease
It is common for a lease to contain a provision allowing tenants to assign their lease to another tenant. A right to assignment is helpful when you wish to sell your business or can no longer keep up with the lease obligations. In most cases, the assignment of a lease will be subject to a landlord’s consent (which they cannot unreasonably withhold). However, the particular conditions will turn on the specific clause within your commercial lease. For this reason, you should carefully review it.
Lease Term
Another important consideration is the length of the commercial lease. Where possible, you want to negotiate this term depending on your particular circumstances. Notably, the length of the lease term will affect the goodwill of your business. You should aim for the term to be for a period where business operations can smoothly run without interference from the landlord.
Dispute Resolution
When entering a commercial lease, disputes may arise between the parties. A dispute resolution clause in a lease agreement will detail a specific process for resolving disputes to avoid parties escalating issues to a court straight away.
Ensure the lease document contains options for alternative dispute resolution, such as:
- information negotiation;
- mediation;
- litigation (court); and
- state-based tribunals in certain circumstances.
Key Takeaways
A commercial lease is a legally binding agreement between a landlord and a business tenant to occupy a commercial space for a specific period in exchange for rent. Signing a lease is often a significant financial and business commitment. Before signing a commercial lease, both parties need to understand the terms and ensure they can meet all of its conditions.
To ensure your commercial lease sufficiently protects your commercial interests, 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.
