As 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 article sets out the legal obligations of a tenant under a commercial lease.
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 lease, 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:
- Consumer Price Index (CPI) rent review: involves a periodic increase in rent at the CPI rate ;
- 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
- 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).
Usually, the security bond is equal to three to six months’ rent. It is often requested in the form of a:
- bank guarantee (if the tenant is an individual); or
- personal guarantee (if the tenant is a company, as the company’s directors provide this guarantee).
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 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.
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. Bear in mind that 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 property . However, this does not include structural issues and capital items (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.
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 property is suitable to their business.
If you need 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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