If you are a tenant, you must comply with the terms of your commercial lease. A commercial lease is a document that sets out 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 occupy that property). This could include leasing for office space, retail tenancy in a shopping centre or any other real estate used for commercial purposes. It is important that you understand your rights and responsibilities under this agreement so that you are not taken advantage of. This article sets out the legal obligations of a tenant in a commercial lease.

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1. Rent Payments

Rent represents the landlord’s return from their ownership of the property. It is also the primary obligation of the tenant in a commercial leasing arrangement, and is a significant expense in operating its business.

The rent for the lease term is specified in the lease agreement. Sometimes the agreement will also specify if the landlord will periodically review rent (i.e. change the value of the rent). The three most common rent review methods are:

  1. Consumer Price Index (CPI) rent review: involves a periodic increase in rent at the CPI rate ;
  2. fixed percentage increase: involves a periodic increase in rent at a fixed percentage agreed upon by the parties (e.g. 4% of current value); and
  3. market rent review: rent value varies according to the market value of the property.

The relevant review method is generally applied annually throughout the term of the lease. It is common for CPI or fixed reviews to occur during the term of a lease. A market review usually occurs at the expiry of the initial term or each option period.

2. Security Bond

In addition to rent, the landlord will generally seek a security bond from the tenant to protect the themselves against a default. A default occurs when the tenant does not properly perform its obligations under the lease (e.g. not paying rent).

Generally in New South Wales (NSW), the security bond is equal to three to six months’ rent. It is often requested in the form of a:

If the bond is an amount of money rather than a guarantee, then the lease should set out conditions regarding use, withholding and repayment of the bond.

3. Responsibility for Outgoings

Outgoings are the running costs of the building and the premises upon which it is located. It is common practice that the tenant in a commercial lease pays both:

  • its own outgoings (e.g. telephone, electricity and gas); and
  • the landlord’s outgoings (e.g. rates, taxes and levies).

The terms of the lease 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.

For example, retail leases generally require that small businesses and retail shops cover the cost of their rent and other expenses, such as utilities, body corporate fees and insurance.

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, which may be up to a specified limit. The amount (if any) is a matter for negotiation between the landlord and tenant.

In addition to the tenant paying for a commercial lease to be drawn up, the tenant will also have to pay their own legal fees.

5. Repairs and Maintenance

Generally, the tenant in a commercial lease will be responsible for repairs and maintenance to the leased premises . However, this does not include structural repairs and capital items within the property (e.g. air conditioning, walls and landlord’s plant and equipment).

6. Insurance Obligations

A lease often requires the tenant to take out and maintain insurance in relation to the building and its contents, together with public liability. A tenant may also need to obtain other types of insurance depending on their business (e.g. motor vehicle insurance). These insurances are generally available in business pack insurance.

7. Consequences of Non-Compliance

A commercial tenant must comply with the terms of their lease. Otherwise the landlord may have the right to terminate the lease and seek damages from the tenant. Given the length of commercial tenancies and high level of ongoing expenses that are often payable under such leases, non-compliance with a commercial lease could be very expensive for a tenant. You should endeavour to establish dispute resolution processes under the lease agreement to minimise long-term issues. 

Key Takeaways

A tenant in a commercial lease must carefully consider and negotiate the terms of their lease. By properly understanding their rights and obligations under the lease, they can ensure that the commercial premises are suitable to their business. If you need legal advice or assistance with negotiating or reviewing your commercial lease, call LegalVision’s leasing lawyers on 1300 544 755 or fill out the form on this page.

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Emma Heuston
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