As you will have learned from part 1, there is a multitude of legal considerations when entering into a commercial lease, most of which it is highly recommended that the expertise of a property lawyer be sought.
Options to renew for a further term
Options allow you to renew the lease agreement for another term if you choose to do so. Since options allow business owners to continue operating in the same location, they’re essential to any lease agreement and should always form part of its terms. Options are usually exercised in writing 3 to 6 months before the lease ends. Before signing any proposed lease agreement, ask the landlord the following questions:
- When can the lease be renewed and how long for?
- How and when can the option be exercised?
- Is the option triggered by certain events?
- What conduct might breach the option?
- Is subleasing an option?
- What about breaking/transferring the lease?
- What other terms or fees, if any, attach to these actions?
Outgoings are expenses of the landlord. They include expenses relating to maintenance, operations, and repairs. While it is not uncommon for tenants to be required to pay these expenses, it is best to negotiate the terms so that you’re only responsible for some and not all outgoings. It is important to know the following:
- What the outgoings are made up of?
- How are they calculated?
- What right of review do you have?
- What the landlord needs to provide to prove the expenses and what level of disclosure is required?
Upon entering a commercial lease agreement with a landlord, you are required to meet rental obligations and additional obligations under the lease. This is done with the understanding that the landlord may terminate the lease and retake possession of the premises if the tenant defaults and fails to meet these obligations.
In anticipation of a major default whereby the tenant owes a significant amount in arrears, the lease terms may also require the tenant to supply a security deposit. The security deposit may be in the form of a bond, a bank guarantee, a director’s guarantee, or a combination of the three.
Bond – the landlord holds a bond as security for the lease. Depending on the particular state, certain variations in the rules relating to bonds may apply. Provided you meet your lease obligations, the landlord must give the bond back to you once the lease ends.
Bank guarantees – this is a guarantee from a bank to meet you debt obligations if you fall into debt. Banks will typically require you to provide them with security for their guarantee. This security can be anywhere from 3-12 months depending on the length of the lease, the use(s) of the premises, and the rental amount/outgoings.
Director’s guarantee – Signing your lease as a company might mean that the landlord will ask for the company’s directors to provide a guarantee in respect of the lease obligations. This will mean that the landlord may personally pursue the directors if the company fails to meet its financial obligations under the lease.
If you are looking at entering into a commercial lease, there are a number of legal considerations that you must take into account. If you need a lease reviewed or assistance in negotiating the terms of the lease, you should consult a commercial property lawyer.
At LegalVision, our team of experienced property lawyers have helped small and larger businesses around Australia manage all their leasing needs.