Reviewing Commercial Lease Agreements: What to Look For Before Signing

In Short

• Understand key lease terms such as length, renewal options, and rent, including additional costs like maintenance and escalation clauses.

• Check use clauses and tenant improvement rights to ensure flexibility for your business operations and alterations.

• Review termination, liability, deposit, and dispute resolution provisions to protect your interests and plan exit strategies.

Tips for Businesses
Always read your commercial lease carefully before signing. Clarify costs beyond base rent, negotiate flexible use and termination terms, and know your responsibilities for improvements and liabilities. Seek legal advice if unsure, as a well-negotiated lease helps avoid costly surprises and supports your business growth.

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Table of Contents

• 1. Lease Term and Renewal Options
• 2. Rent and Additional Costs
• 3. Use Clause
• 4. Tenant Improvements and Alterations
• 5. Termination and Exit Strategies
• 6. Indemnification and Liability
• 7. Security Deposit and Guarantees
• 8. Dispute Resolution
• Key Takeaways
• Frequently Asked Questions

Entering into a commercial lease agreement is a significant decision for any business. Whether you are starting a new venture or expanding an existing one, the lease will govern the terms of your occupancy. It will affect your operations and finances. Understanding what to look for in a commercial lease can save you from potential pitfalls. Doing so will also ensure that the terms align with your business objectives. This article will serve as a useful guide to reviewing commercial lease agreements.

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1. Lease Term and Renewal Options

One of the first aspects to consider is the lease term. Commercial leases can vary significantly in length, ranging from a few months to several years. Longer leases may offer stability. However, they can also tie you down, especially if your business needs change. Conversely, shorter leases provide flexibility but might come with higher rates or less favourable conditions.

It is also essential to look for renewal options within the lease. These clauses can dictate how you may extend your lease and under what conditions. Ensure that the renewal terms are clearly defined, including notice periods and any potential rent adjustments.

2. Rent and Additional Costs

The base rent is a straightforward figure, but commercial leases often involve additional costs that can significantly impact your bottom line. Three common additional expenses are:

1. Operating Expenses: These may cover maintenance, repairs, property taxes, and utilities. Understand what is included in your rent and what costs you are responsible for.
2. Common Area Maintenance (CAM): In multi-tenant properties, CAM charges can vary widely. Clarify what services are included and how costs are calculated.
3. Escalation Clauses: These clauses detail how and when your rent may increase. Look for any caps on increases and the basis for adjustments, such as the Consumer Price Index (CPI).

3. Use Clause

The use clause defines how you can utilise the leased space. Ensure that it aligns with your business operations. If you anticipate diversifying your offerings or changing your business model, check if the clause allows for modifications. Restrictive clauses may limit your growth potential, so negotiate terms that provide the necessary flexibility.

4. Tenant Improvements and Alterations

Most businesses need to customise their space to suit their operations. The lease should outline your rights regarding tenant improvements. Three key points to consider include:

1. Approval Process: Understand what modifications require landlord approval and how that process works.
2. Responsibility for Costs: Determine who bears the costs for improvements. Some landlords may offer allowances, while others expect tenants to cover all expenses.
3. Restoration Obligations: Know what, if any, restoration obligations you may have at the end of the lease. You could be required to return the space to its original condition, which could entail significant costs.

5. Termination and Exit Strategies

Life is unpredictable, and business needs can change rapidly. Therefore, it’s crucial to understand the termination provisions in your lease. Look for the following two things:

1. Early Termination Options: These can offer you a way out if your business needs change, though they may come with penalties.
2. Subletting and Assignment Clauses: If you want the flexibility to transfer the lease to another party, ensure the lease allows subletting or assignment and understand the conditions under which these are permitted.

6. Indemnification and Liability

Commercial leases typically include indemnification clauses. These determine liability for damages or injuries that occur on the property. Be clear about your responsibilities in this regard. You may also want to consider whether you need additional insurance to cover potential liabilities. Consult with a legal professional to ensure you fully understand your exposure.

7. Security Deposit and Guarantees

Most landlords require a security deposit, which can be a significant upfront cost. Understand:

• the amount;
• the conditions under which it may be retained; and 
• the timeline for its return after the lease ends. 

If you are entering into a long-term lease, check if the landlord offers any alternatives, such as a reduced deposit with a personal guarantee.

8. Dispute Resolution

Commercial leases often outline how disputes will be handled. Look for clauses that specify whether disputes will be resolved through:

• mediation;
• arbitration; or 
• litigation. 

Having a clear process can save time and resources if conflicts arise. Ensure you are comfortable with the chosen method and understand the implications.

Key Takeaways

Reviewing a commercial lease agreement thoroughly is crucial to safeguarding your business interests. Take your time to understand each clause, ask questions, and negotiate terms that align with your operational needs and future goals. A well-negotiated lease can set the foundation for a successful business venture. This will allow you to focus on growth rather than grappling with unexpected lease complications.

If you need assistance reviewing your commercial lease agreement. our experienced leasing lawyers can assist you as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers who can answer your questions and draft and review your documents. Call us today at 1300 544 755 or visit our membership page. 

Frequently Asked Questions

What is a use clause, and why is it important?
A use clause defines how you can use the leased space. It’s vital to ensure it matches your current and future business activities to avoid restrictions on your operations or growth.

Can I make changes or improvements to the leased space?
Yes, but the lease will specify what alterations need landlord approval, who pays for them, and whether you must restore the space at lease end. Negotiate these terms clearly before signing.