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Commercial Leases

Commercial Leases

A commercial lease may be a legally binding agreement between a landlord and a business tenant for the rental of property. Compared to a residential lease, commercial leases are more complicated because the lease terms can vary significantly from lease to lease and should also vary consistent with whether the lease may be a for commercial premises or retail premises. Before signing a commercial retail lease, both parties must understand the terms and ensure they can meet all the terms and conditions.

Leasing Commercial Premises

A commercial lease usually runs for a period of 3 - 5 years, usually with options to renew for a further a further term. When getting into lease negotiation, you ought to understand your obligations. You are often required to give a personal guarantee. Don't do this lightly. You can be signing your life away. Prior to signing the lease you should consider zoning, permits and building requirements. Moreover, consumer laws that apply to residential leases don't cover commercial leases.

Retail Premises Legislation

All states and territories have specific retail leases legislation. In NSW it's the Retail Leases Act 1994. The Acts specify which premises are considered to be retail premises and these vary from state to state. If a business is found during a retail plaza and/ or wholly, or predominantly carries on a retail business, it's likely that lease are going to be governed by the provisions of the relevant retail leases Act for that state or territory. Generally speaking, the Acts aim to make sure retail leasing arrangements are fair which there are inbuilt mechanisms to resolve disputes between landlords and tenants.

Negotiating a Lease

Commercial lease terms are usually negotiable between parties. When negotiating a lease, the rights and obligations of both parties should be on the table for negotiation. Types of rights and obligations during a commercial and/or retail lease can include signage, fit out of premises, use of common areas, building bye-laws, use of common areas etc. As a tenant, concentrate to your specific circumstances before you bind yoursefl and find yourself committed, usually personally, to a lease. An inexperienced tenant will sometimes accept the first lease they receive, to their detriment. This is often poor negotiation practice – there's no requirement or obligation on a prospective tenant to simply accept the primary lease. A far better practice would be engage Sydney Law Solutions, hve us review your lease and advise on any unfair provisions. We will then negotiate amendments with the owner or the Landlord’s lawyer.

Fixtures and Fit-Out

A condition report of the premises should be obtained before getting into a lease. This report will provide information on the fixtures, fittings and services installed at the premises. the varied retail leases legislation require that a disclosure statement be provided by the owner .

Costs

In addition to ongoing rental costs, there are variety of costs to be borne by the tenant, including:

  1. Security bonds - Bank Guarantees
  2. Insurance costs
  3. Legal costs (lease preparation in some cases and costs on default). Watch out - you may be liable not only for your own lawyers costs but also those of the landlord's solicitor
  4. Refurbishments
  5. Repairs and maintenance and
  6. Make good at the end of the lease.

It is important to get advice on these matters before agreeing to a lease. For instance, lease preparation costs can't be passed on under most of the Retail Leases legislation from state to state. However, there's no such restriction for commercial leases.

Assignment of Lease

A lease may allow tenants to assign the lease or part of the premises to a different tenant. This will be exercised in cases where a business decides to sell or can not operate the business. In most cases, assignment are going to be subject to a landlord’s consent and/or the varied retail leases legislation if it's a retail lease.

Key Considerations

A potential tenant should make enquiries and conduct research about the business potential, the lease and any conditions before making any commitments.

What is the duration of the commercial lease? Is there an option period (or periods)? Generally, a lessee won't be liable for the payment of any outgoings. For retail leases the owner must detail the outgoings the tenant has got to pay within the disclosure statement before entry into the lease.

Term of Lease

The length of the term of the lease will affect the goodwill of your business. The term of the lease are going to be security of tenure for the specified time. It should be a period where business operations won't be interfered by the owner.

Preliminary Documentation

A lease is simply one document required amongst a suite of documents in leasing a premises. Preliminary documentation can comprise of a Heads of Agreement, an Agreement to Lease, a Lease Incentive or Contribution Deed (if the owner are going to be contributing to your fitout costs). Then there is the lease itself.

If it's a retail lease, under the various Acts, a landlord is required to offer a tenant Disclosure Statement before the lease documents are entered into. Note specific requirements vary from state to state in this regard.

Dispute Resolution

In entering a commercial lease, disputes often arise between tenant and landlords. The lease will usually be the primary document dictating how any disputes may be resolved. In resolving disputes, options will include informal negotiation, mediation, litigation (court) and various state based tribunals.

Frequently Asked questions on Commercial Leases

Q: What's an anchor tenant?
A: An anchor tenant generates significant pedestrian traffic for other premises within the building (such as a supermarket or department store). A lease provision are often incorporated to terminate a lease if an anchor tenant departs.

Q: What can a landlord do a few tenant in default?
A: A landlord with a right to evict a tenant can request formal eviction if rent has not been paid. Written notice must tend of non-payment before any consequences are often faced by the tenant. Note that the owner must adhere to the lease and the other state based legislation in this regard.

Q: What about redevelopment?
A: A redevelopment clause entitles the owner to terminate a lease, before the end of the lease, so as to carry out major works. Whilst it's valid, a tenant should be compensated for redevelopment. Note that leases may include both redevelopment and demolition clauses.

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Aoife O'Donohoe

Aoife O'Donohoe

Solicitor | Sydney