Leasing can be confusing. Is it a retail lease? What does ‘make good’ mean? At LegalVision, we deal with these questions daily. Below, we’ve prepared a glossary of terms to help demystify the complex world of leasing.
A – Assignment of Lease
An assignment of lease occurs where the legal ownership of the lease transfers from the existing (or original) lessee to a new lessee. The new lessee effectively “takes over” the lease (or sublease) (Assignment).
The lessor (or landlord) must consent to the Assignment of a lease. Note that retail leases have more extensive rules surrounding Assignment as opposed to commercial (non-retail leases).
B – Bank Guarantee
It is common that a prospective tenant provides a bank guarantee as security under a lease.
The landlord holds a bank guarantee as security for a tenant performing all obligations under the lease, with the ability to cash in the bank guarantee if the tenant breaches the lease or does not pay rent on time.
Note there are specific requirements for bank guarantees, and you should confirm these with the landlord at the time of entering into the lease.
C – CPI Increase
The majority of leases (commercial or retail) provide a mechanism for rent review during the term of the lease and at the exercise of that option.
There are three common rent review methods used to review and increase rental payments:
- CPI (Consumer Price Index) increase: Increased in line with the inflation rate for that year/period;
- Fixed price increase: Increased by reference to a fixed percent (such as 3% or 4%); and
- Market review: Increased by reference to an assessment of the current market rent of the premises.
D – Disclosure Statement
A disclosure statement:
- Is a statement the landlord (or lessor) provides to the tenant regarding a retail lease;
- Contains information and material required by various state-based retail lease legislation; and
- Must be provided on the prescribed form set out by the applicable state or territory law.
E – Expenses
Leases are expensive. Be clear on the following:
- Who pays for lease preparation, negotiation and execution, noting retail lease laws regulate these expenses but commercial leases are not regulated;
- Who will pay for the fitout of the premises? Will the lessor provide an incentive or fitout payment; and
- What are other expenses you need to budget for, such as the bank guarantee, first months rent, insurance and so on.
F – Fit Out
After signing the lease, the majority of premises will need to be ‘fit out’ before opening up the doors for business.
Fitout can involve shop fitting, fixtures, fittings and services such as electricity, telephone, internet and gas.
The lease will cover who is responsible for the cost of fitting out the premises and whether the landlord will provide a rent free period or fitout incentive. Handover dates and requirements as to fit out should be finalised, and the quality of the fit out work should also be discussed, before signing a lease.
G – Guarantee/Guarantors
It is common for a landlord to require a personal guarantee from the director (or directors) of a tenant’s limited liability (Pty Ltd) company (known as a guarantor).
From the landlord’s perspective, a guarantee provides comfort and security. If the lessee cannot pay the rent or other expenses, the landlord can simply call on the guarantor to pay the bills the corporate lessee has not paid.
From a tenant’s perspective, this can be dangerous as it places their personal assets at risk, such as a home, motor vehicles and any shares or investments.
You must give careful consideration before providing a guarantee, noting there are alternative options or ways to limit personal guarantees.
H – Holding Over
If a tenant occupies leased property (with the consent of the landlord) after the term or option term of a lease has expired, it is said that the tenant is “holding over”. The terms of the lease otherwise apply, but either party can terminate the lease with notice (usually one month).
I – Insurance
A lease agreement contains a requirement that the lessee take out insurance and keep this current during the term of the lease.
Common types of insurance for leasing are:
- Public liability
- Workers compensation; and
- Plate glass insurance.
Business interruption and theft/fire etc. are also common requirements.
J – Joint Access to Common Areas
K – Key Money
Key money is a payment from the tenant to the landlord to secure a lease without any consideration given in return.
Most retail leases across Australia prohibit key money payments as they can be unfair.
L – Leasing
- Is an interest in land granted by the landowner (lessor or landlord) to another person (lessee or tenant);
- Is usually for a fixed term;
- Gives the lessee exclusive possession of the land (or premises) for the fixed term of the lease; and
- Must be in the form of a deed.
M – Make Good
A make good clause is a clause that sets out how a tenant (lessee) will “make good” the appearance of the premises at the end of the lease. Generally speaking, this means that the property should be returned to the condition it was in at the start of the lease, with the exception of reasonable wear and tear. However, some leases contain specific redecoration requirements such as re-painting, replacing floor coverings, etc.
N – Notice
Notice refers to the amount of time you must give to terminate your lease. Note; you can only terminate a lease in limited circumstances during a fixed term.
O – Outgoings/Operating Expenses
Outgoings are additional costs which relate to the property (such as land tax, rates, water usage, maintenance costs) that relate to the property. In some cases, these are payable in addition to the rent paid by the tenant. Outgoings (or operations expenses) are usually calculated proportionately to the percentage of the building that the tenant leases.
P – Percentage Increase/Turnover Percentage
Turnover rent is a lease where the rent, or part of the rent is calculated by virtue of the tenant’s financial turnover. In general, there is a base rent and once that base is reached, rent is calculated on the turnover of the business on a pro rata basis with a turnover percentage specified in the lease.
Q – Quirky Lease Clauses
Leases can be complex and warrant close attention to pick up any unusual or onerous lease clauses. Have one of our leasing lawyers review your lease before signing anything.
R – Retail Lease
Each State and Territory in Australia has its own legislation that regulates retail tenancies across the country. Note that each state and territory has its own definition of a “retail lease” and the leased premises that come under the auspices of the legislation. If a lease is considered a retail lease, it will generally have greater protection and government regulation than other leases.
S – Sub-Lease
A sub lease is either:
- A lease of a leased premises to another tenant by the original tenant (sub lessor); or
- A sublease of part of the leased premises (so that they are shared by the sub lessor and sub lessee), such as leasing an office in a suite of offices.
T – Termination Clauses
All leases generally contain termination clauses. When you enter into a lease, it is important to determine how a lease can be terminated, and by which party. During a lease, if either party wishes to terminate the lease the clauses should be examined closely and advice sought.
U – Use of Premises (Permitted Use)
The permitted use clause of a commercial lease is critical. If a tenant does not comply with the permitted use they may be in breach of the lease. It is, therefore, important to investigate what the permitted use of the premises are as either a tenant and landlord and whether any zoning laws allow for this.
V – Variation of Lease
A variation of lease is a change to the rent, term or other core provisions of the lease agreement.
In New South Wales, section 55A(1) of the Real Property Act 1900 (NSW) (RPA) allows a lease to be varied so as:
- To increase or reduce the rent payable under the lease; or
- Increase or reduce the period for which the lease is to have effect (i.e. the term); or
- To otherwise vary, omit or add to the provisions of the lease.
W – Warranties/Liability
Leases often contain warranties or promises for use of the property. It is important to carefully consider these clauses at the time of entering into the lease. LegalVision suggests that you obtain legal advice before agreeing to any warranty or liability clauses.
X – Xerox
X is for a Xerox copy. Make sure you keep copies of all leasing correspondence, the lease agreement, and any receipts for outgoings and the like.
Y – Your Rights
When entering into a lease, whether it be as tenant, landlord, sub lessor, sub lessee, head lessor or guarantor it is important that you understand your rights. It is crucial to obtain legal advice in this regard.
Z – Zoning Laws/ Government Regulations
When leasing premises, it’s important to consider the council zoning laws and other legal requirements (such as liquor licensing laws) that apply to the property and the industry that your business is part of. Clarify these matters before deciding on premises and signing up to a commercial or retail lease.
Questions? Get in touch on 1300 544 755.