In Short
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Key Tenant Obligations: Understand your primary responsibilities such as rent payments, outgoings, and insurance requirements.
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Security and Guarantees: Be aware of the security requirements, including bank guarantees, cash bonds, or personal guarantees from company directors.
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Repairs and Maintenance: Know your obligations regarding repairs and maintenance, and ensure you are clear on the make-good clauses when vacating the premises.
Tips for Businesses
Before signing a commercial lease, thoroughly review your obligations, including rent, security, and outgoings. Understand the specific clauses related to repairs, maintenance, and make-good requirements. Seek professional advice to ensure all terms are clear and fair, and negotiate any terms that could place an undue burden on your business.
If you are a tenant, you must adhere to the terms of your commercial lease. A commercial lease is a document that outlines the rights and obligations of:
- the landlord or lessor (i.e., the owner of the commercial property); and
- the tenant or lessee (i.e., a third party that has agreed to lease that property).
This may include leasing office space or any other real estate intended for commercial use. You must understand your rights and responsibilities under this agreement to avoid exploitation. This article outlines some common legal obligations of a tenant in a commercial lease.
A factsheet that sets out the three ways to end a commercial lease in Australia: surrendering your lease, assigning it or subletting it.
1. Rent Payments
Rent reflects the landlord’s return on their property ownership. It is also the tenant’s key obligation in a commercial leasing arrangement. It represents a significant expense in running your business.
The rent for the lease term is specified in the lease agreement. Sometimes, the agreement will specify whether the landlord will annually review the rent (i.e., change the value of the rent). The three most common rent review methods are:
- Consumer Price Index (CPI) Rent Review: involves an annual increase in rent at the CPI rate;
- Percentage Increase: involves a yearly increase of rent at a fixed percentage agreed upon by the parties (e.g. 4% of current value); and
- Market Rent Review: rent value varies according to the property’s market value.
The relevant review method is generally applied annually throughout the lease’s term. CPI or fixed-percentage reviews are common during this time, and a review usually occurs at the start of each option period.
2. Security
Alongside rent, landlords typically require security from tenants to safeguard against defaults. A default occurs when a tenant fails to meet their obligations under the lease, such as not paying rent. If a default happens, landlords often draw down on the security to ensure the tenant’s obligations are fulfilled. When the security is used to meet the obligations, the tenant usually must replenish it to the required amount specified in the lease.
Generally, in New South Wales (NSW), the security is equal to three to six months’ rent. It is often requested in the form of a:
- bank guarantee;
- cash bond; or
- personal guarantee (if the tenant is a company, the company’s directors provide this guarantee).
The lease should also set out the requirements for the security conditions, whether provided in the form of a bond or bank guarantee. Typically, the lease should set out the conditions regarding its use, withholding and return of the security amount.
Continue reading this article below the form3. Responsibility for Outgoings and Utilities
Outgoings refer to the running costs associated with the building and the premises where it is located. Utilities include the standard building services typically used by the tenant. It is standard practice for tenants in a commercial lease to pay both:
- utility costs (e.g. telephone, electricity and gas); and
- the landlord’s outgoings (e.g. rates, taxes and levies).
The lease terms must specify which party is responsible for payment of outgoings. It should also detail:
- how the value of outgoings is determined; and
- how they are to be paid, such as whether they are apportioned as an estimate and adjusted later, for instance, once per financial year or annually.
Alternatively, the outgoing costs can be paid once the landlord provides an invoice for the outgoings to ensure that the amounts are accurate at the time of payment.
4. Payment of Legal Fees
It is common for the tenant to pay the landlord’s reasonable legal fees for preparing and negotiating the lease. This may be up to a specified limit. The amount (if any) is a matter for negotiation between the landlord and tenant. If the lease is going to be registered, it is common for the tenant to be liable for the registration costs.
In addition to the tenant paying for a commercial lease to be drawn up, the tenant will also have to pay their legal fees.
5. Repairs and Maintenance
Typically, a tenant in a commercial lease is responsible for repairs and maintenance of the leased space. However, this responsibility may exclude structural repairs and capital items within the property, depending on the agreement between both parties. Excluded repairs may include:
- air conditioning;
- walls; and
- the landlord’s plant and equipment.
6. Insurance Obligations
A lease often requires tenants to obtain and maintain insurance for the premises and any ancillary spaces they may use and occupy, including their contents. Tenants may also be required to have public liability and workers’ compensation insurance. A tenant may also need to secure other types of insurance depending on their business (e.g., motor vehicle insurance). These insurances are generally available in a business pack insurance.
7. Consequences of Non-Compliance
A commercial tenant must comply with the terms of their lease. Otherwise, you may find yourself in default. This would give the landlord the right to terminate the lease and seek damages from you. Given the duration of commercial tenancies and the high ongoing expenses often payable under such leases, non-compliance with a commercial lease can be very costly. You should strive to establish dispute resolution processes within the lease agreement to minimise long-term issues.
8. Make Good Obligations
A key consideration as the lease ends is your make-good obligations for repairing and restoring the premises when vacating.
You should consult the lease to determine what is needed to restore the premises before you leave. Some leases may require you to return the premises to a ‘bare shell’. Other leases may only ask you to remove your belongings or refloor, repaint, or replace any damaged or worn flooring.
Bearing this in mind, it is common for some leases that require returning the premises to their condition at the commencement or handover date to be accompanied by a condition report. This report enables the parties to reference the state of the premises at an earlier time, such as after it was fitted out or at the commencement or handover date. It helps identify which items need repair and is consistently reliable in determining the scope of work required for make-good repairs or replacements.
Key Takeaways
A tenant in a commercial lease must thoroughly consider and negotiate the terms of the lease. By fully understanding your rights and obligations under the lease, you can ensure that the commercial premises meet your business needs.
If you require legal advice or assistance with negotiating or reviewing your commercial lease, our experienced leasing lawyers are available to help you as part of our LegalVision membership. For a low monthly fee, you’ll enjoy unlimited access to lawyers who can answer your questions and draft or review your documents. Give us a call today at 1300 544 755 or visit our membership page
Frequently Asked Questions
In a commercial leasing arrangement, paying rent is the tenant’s primary responsibility. Since it represents a significant business cost, you must consistently pay the rent as outlined in the commercial lease.
Outgoings refer to the operational costs of the building and the premises where it is located. It is standard practice for the tenant in a commercial lease to pay their own outgoings and those of the landlord.
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