What is a commercial lease?

A commercial lease is a document that sets out the rights and obligations of the owner of a commercial property (known as the landlord or lessor) and a third party that has agreed to occupy the property (known as the tenant or lessee).

For more information on the obligations of commercial tenants see our article “Legal Obligations of a Tenant in a Commercial Lease”.

There are different types of commercial leases that apply to different circumstances, although they are all forms of commercial leases they are not generally referred to as commercial leases.  The following are all forms of commercial leases:

• Retail Leases
• Commercial Leases
• Licences
• Assignments and Sub-Leases

Retail Leases

Each Australian state and territory has legislation dealing with retail leases.  In NSW, the Retail Leases Act 1994 provides that retail leases are leases over most retail premises, which are premises used wholly or predominantly for retail shop businesses (whether or not they are in a retail shopping centre).  However, in NSW the Retail Leases Act does not apply to, amongst other things, retail shops with a lettable area over 1000 square metres, shops operated within a cinema, bowling alley or skating rink by the same person who operates the cinema, bowling alley or skating rink, shops in an office tower that form part of a retail shopping centre and leases for over 25 years (including any options to renew).

Retail leases legislation imposes additional obligations on landlords and provides additional rights and protections to tenants who lease retail premises, when compared to non-retail commercial leases.

It is critical to determine at an early stage whether the relevant legislation in your state or territory applies to premises as it will effect what has to be done before a lease is entered into, not just what is in the lease and after the lease is entered into.

Commercial Leases

As far as rent is concerned, ordinary commercial leases can be prepared on a number of bases.  For example, rent could be calculated as follows:

• base rent, no outgoings;
• base rent, plus outgoings;
• base rent, plus a percentage of sales;
• rent review as market review, fixed percentage, based on CPI measure.

The bargaining positions of the landlord and tenant, including each of their size, demand for premises and strength of the market, could determine the rental terms of the commercial lease.

Commercial leases are generally entered into for a period of 3 to 25 years, which includes an initial term and options for the tenant to renew the lease.  For example, a 25 year lease would usually be for an initial term of 5 to 10 years followed by successive options of 5 to 10 years each.

Licences

A licence is generally entered into for short-term rental periods.  Given their short-term nature they are less likely to include provisions for the amount of rent to change, requiring the tenant to pay outgoings in addition to rent or for the tenant to undertake repairs and maintenance.  However, given their short-term nature they are also unlikely to include any option to renew, which means that they are only appropriate for businesses that only want to occupy premises for a short-term period.  If there is a chance that you want to occupy premises longer-term then it would be in your interests to enter into a short-term lease (e.g. one year) with options to renew.

Assignments and Sub-Leases

An assignment of a lease or sub-lease is an agreement between a tenant and a third party for the third party to either assume the tenant’s obligations under the lease with the landlord (i.e. assignment) or is a new agreement between the tenant and third party (which may or may not be on the same terms as the lease between the landlord and tenant).

A tenant cannot enter into an assignment or sub-lease unless its lease with the landlord allows the tenant to do so, and may only be permitted with the landlord’s consent.  This provides the tenant the flexibility to relocate to new premises, abandon its business or downsize its operations, while not necessarily having to continue to pay the landlord under the lease.  However, entering into an assignment or sub-lease does not necessarily mean that the tenant has no future obligations to the landlord and care must be taken to ensure the terms of the assignment or sub-lease mirror the lease.

Conclusion

If you’re in need of a commercial lease review, or need one drawn up from scratch, contact LegalVision today to speak with one of our experience leasing lawyers.