Welcome to part 2 of “Expenses in a Commercial Lease?”, where we will discuss, amongst other things, the impact of GST, the factors that impact the term of a commercial lease, and what to consider when negotiating an option clause.
GST
The landlord will usually pay for the cost of GST, but, as you might’ve expected, will attempt to pass on these costs to the tenant. Make sure you understand whether or not the rent in your contract reflects rent inclusive or exclusive of GST. Normally, for any GST paid on rent, you’ll be entitled to an input tax credit.
Term
The term of a commercial lease is the duration of the commercial lease. Many factors can play a role in determining the term of your commercial lease. New businesses might prefer a shorter lease to avoid overcommitting financially, whereas a more established business may prefer longer terms to make it easier to sell the business when the time comes. Otherwise, the business owner may be forced to request a last minute lease extension/renewal from the landlord to secure the sale. As such, it advisable to negotiate a shorter initial term with a couple of renewal options attached.
Most leases are at least 5 years long under the provisions of the Retail Leases Act. If, however, your solicitor requests a shorter lease, he or she must do so by providing the landlord with a section 16(3) certificate, which essentially acts a waiver of this rule. Failure to deliver this certificate will result in any lease less than 5 years automatically extending to the 5-year minimum. For this reason, legal advice is recommended.
In some circumstances, you may need to find a replacement tenant to assign the lease to. Failure to do so can mean you are liable for the remaining rental obligation for the duration of the term. This does not mean that the landlord can demand the total amount that would be owed for the remainder of the lease. They have an obligation to mitigate any loss by doing everything reasonable to relet the premises once it becomes vacant.
Like most problems, ignoring them does not help the situation. If you run into financial problems, the best thing to do is to communicate these difficulties with the landlord. The landlord might ask for less rent instead of losing you as a tenant.
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Option
The landlord can grant the tenant an option to renew. This extends the lease for an additional term. The landlord can also give the tenant the option to buy the property, or, in the event the landlord wants to sell the property, the ‘first right of refusal’ may be granted. This is uncommon.
Options allow tenants to extend the lease for the additional term specified in the option clause. The landlord must accept the renewal of the lease if the tenant follows all procedural requirements in exercising the option.
The tenant may not be entitled to the option if they do not exercise the option within the time limits or in the manner required under the terms of the option clause. Tenants in breach of any essential terms may also be excluded from exercising the option to renew.
You do not have to exercise any option in your commercial lease. It is a choice for the tenant. If you have built up a reputation in the area, the goodwill of the business may become very valuable. In this case, staying in the same location may be extremely important to maintaining the value of the business.
Many actions in a lease are recoverable. Failure to exercise your option in accordance with the terms of the option clause is not one of them, which highlights the importance of seeking legal advice.
It is worth finding out what method for calculating rent will be used before you exercise your option to renew. For the ‘market rent’ review method (which calculates the market value of comparable properties), make sure this is an amount that your business can afford. If it isn’t, have your leasing lawyer negotiate a better rent review option before time runs out. If you do not record the date and method to exercise the option, you might miss the opportunity. This 3-month window to act is crucial and should not be forgotten. The risk is losing the renewal option, which could prove commercially fatal to your business.
Conclusion
If you need legal assistance reviewing or drafting any lease documents, our team of experienced commercial leasing lawyers can help. For an obligation-free fixed-fee quote, contact LegalVision today on 1300 544 755.
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