city competence
coastal calm
Understanding commercial (and retail shop) leases
When renting business related property it is vital for both landlords and tenants to understand the agreement they are entering into, and their respective rights and obligations. A lease is a legally binding contract that gives you certain rights in relation to a property for a set term. A commercial lease is used when leasing property used primarily for a business.
You should never sign a lease without understanding all of its terms and conditions. If you don't understand what you are agreeing to you may encounter serious financial and legal problems.
It's important to properly investigate the property and understand the lease document before you sign. Your lawyer can give you legal advice, draft new clauses and help you negotiate the terms and conditions to suit you.
A lease that is good for a landlord may not be good for a tenant, and vice versa, and leases bind you for lengthy periods and involve substantial sums.
Important issues to consider when entering into a lease
Commercial leases usually contain terms dealing with:
Term of the lease: The lease should specify the length of the lease and any options to renew the lease and any terms relating to the renewal. A landlord will generally prefer a longer initial lease term (typically 3, 5 or 10 years) whereas the tenant may prefer a shorter period (1-3 years), with multiple options.
Option to Renew: An option allows the tenant to continue leasing the property on similar terms at the end of the period of the lease for a further defined period and rent (subject to any review). Options gives the tenant the ability to make longer term plans for its business.
Knowing the procedure for exercising the option, and especially when the option can be exercised is critically important
Rent: How much is the rent and when is it due? The amount of the rent will usually be calculated based on the area of the premises.
Rent Increases: Rent will usually increase annually during the term of the lease, with increases determined by a fixed percentage, market based or tied to the CPI. It is common for CPI or fixed reviews to occur during the term of a lease and for a market review to occur at the expiry of the initial term and each option period.
Outgoings. The lease will set out who is responsible for outgoings like utilities, property rates & taxes (including land tax), body corporate levies (if relevant), insurance, and repairs. This is a very important clause.
Security Deposit or Bond: The landlord will usually ask for some form of security from the tenant in case it defaults on its obligations (e.g. not paying rent). Such security is usually for an amount equal to 2 or 3 months’ rent and may be provided by way of bank guarantee, or cash. If the tenant is a company personal guarantees from the company’s directors may also be required. The lease should also contain terms regarding the return of such bond.
Improvements: A lease should address what improvements or modifications can be made to the property, who will pay for the improvements, and whether the tenant is responsible for returning the property to its original condition at the end of the lease.
Description of the property: The lease should clearly describe all of the property being leased, including bathrooms, common areas, kitchen area and parking spaces. It will usually be necessary to attach a plan, unless the whole of the property is being leased.
Signage: Any restrictions on putting up signs, eg. that are visible from the street, will be included in the lease.
Use of the property: Most leases include a clause defining what business the tenant is permitted to undertake on the property (eg. what type of business). A tenant should seek broad usage clause in case the business expands into other activities.
Insurance. You should contact your insurance company and discuss the clauses referring to insurance, so you fully understand what is covered by the lease, and your obligations.
Exclusivity clause: This is an important clause for retail businesses renting space in a commercial complex, to prevent a landlord from renting space to a competitor.
Assignment and subletting: A tenant should maintain the right to assign the lease or sublet the space to another tenant. Usually the tenant is still ultimately responsible for paying the rent if the business fails or relocates, but with an assignment or sublet clause in place, the tenant may find someone else to cover the rent.
Maintenance & Repair: the lease should clearly set out who is responsible for maintaining or repairing the property and the fixtures and fittings during the term of the lease.
Make Good: A tenant should carefully review the make-good obligations in the lease. Often these can be onerous and involve considerable expense on the part of the tenant in having to reinstate the premises to their original condition when the lease commenced.
Termination: The circumstances under which the lease will be terminated should be set out in detail in the lease.
Costs: The landlord may want the tenant to pay some or all of its legal fees (e.g. preparation of the lease, preparation of any plan and of obtaining mortgagee’s consent) and this should be clearly set out in the lease. Where applicable, retail shop legislation regulates what fees a landlord can pass onto a tenant.
Retail lease or general commercial lease?
The Retail Shop Leases Act 1994 (‘the RSLA’) regulates almost all retail leases in Queensland.
The RSLA is being significantly amended effective as and from 25/11/2016.
This article will not attempt to deal with those changes, but if you are interested in receiving updates on the effect of the wide ranging changes to the Act, please contact our office and we will include you on the list of clients to whom we send updates regarding the amendments to the Act.
For a new retail lease the landlord is legally required to give to the tenant at least 7 days before entering into the lease:
- a written lease with matters agreed to and signed off by both parties.
- a disclosure statement.
The disclosure statement outlines important information about the lease, and must be in the prescribed form.
Before entering into the lease the tenant is required to provide the landlord with a lessee disclosure statement. The lessee disclosure statement provides an outline of the potential tenant’s business background and experience (and allows the tenant to record the details of the representations made by the landlord or their agent.)
Tenants who lease less than five retail businesses in Australia must obtain a legal advice report and a financial advice report and provide these completed reports to the landlord before entering into a retail shop lease or an assignment of a lease.
Conclusion
It is vital that landlords and tenants fully understand their rights and obligations with respect to Commercial and Retail leases.
It is a good idea to ask your lawyer to explain what each clause in the lease means and to get their assistance in negotiating the terms and conditions that suit you.
If you or someone you know wants more information or needs help or advice, please contact us on (07) 5443 4866 or email kwaddington@gwlaw.com.au.
Ken Waddington
Partner
(07) 5443 4866