If your business needs to occupy certain premises to run its operations, it is likely you will enter a commercial or retail lease. Similarly, if you own commercial premises, you will want a carefully drafted lease agreement in place before going into a long-term leasing arrangement. Leases represent significant financial commitments for both parties. The arrangements should be commercially viable, achieve a balance of rights, and include comprehensive terms to provide clarity and minimise disputes.
Reviewing and negotiating your lease
We can prepare, review, and negotiate your lease documents to ensure they include key provisions and cover a range of events that may not be anticipated at the time of conducting your negotiations. We will explain your obligations under the lease and ensure that it adequately protects your rights.
If you are leasing premises defined as “retail”, certain aspects of your arrangements will be regulated under the relevant retail leasing legislation in your jurisdiction, and the lessor will typically need to comply with specific disclosure requirements. We can confirm if the premises falls under retail leasing legislation and ensure the lease is correctly prepared and the arrangements are compliant.
Lease term
The term of a lease agreement needs to reflect the lessee’s operational plans for the business, as far as practicable, and the lessor’s investment strategy for the premises. If the property is likely to be sold in the future, its marketability can be affected by the current lease status.
Commercial leases typically run for a longer period than residential leases which can benefit both the lessor and lessee. While a lessor secures a long-term tenant and ongoing rental income, the lessee secures long-term occupation without having to find alternate premises and relocate operations elsewhere. That said, both parties need to consider a range of contingencies that can impact their plans. For example, if a business performs poorly, the lessee will likely experience cashflow problems making it difficult to pay rent over a longer period. This is problematic for both parties and can lead to disputes.
Option periods
One of the ways to deal with the pros and cons of a lessee entering a lengthy commercial lease is for the lease to be for an initial term with an option to renew. Option clauses provide a lessee business the opportunity to renew a lease if the premises is still suitable for its operations provided it continues to meet its obligations and exercises the option in accordance with the terms of the lease. For example, a lease may provide for an initial two-year period with an option to renew for a further two years. In such circumstances, the lessee will have the option to exit the lease at the end of the initial two-year term or exercise the option to renew for a further two years. The option clause typically stipulates how future rent will be calculated if the option is exercised.
Assignment provisions
Assignment provisions allow a lessee to assign the lease with the lessor’s consent. These clauses can be attractive for a lessee, particularly if starting a new business where prospects of success are unknown, or if a lessee proposes selling the business in the foreseeable future. From a lessor’s perspective an assignment clause should allow for discretion to determine the financial viability of a proposed incoming lessee and allow reasonable assignment costs.
Fixtures and fit out provisions
Negotiating any fixtures and fit out clauses in a commercial lease can make a significant difference in a lessee’s setup costs and improve the suitability of the premises for the unique needs of the business. Parties may also negotiate a rent-free period during a defined fit out stage or for a lessor to fund certain components of regular refreshes.
It is usually the lessee’s responsibility to return the property to a good condition at the end of the commercial lease, which may mean removing all internal fit out and leaving the property as an empty shell. Negotiations and clear provisions at the start of the lease can prevent ambiguities and disputes down the track. The lease should be very specific about what is required of the lessee at the end of the lease.
Repairs and maintenance
Ambiguous or non-existent repairs and maintenance provisions often lead to leasing disputes, many of which could have been avoided had the lease been well drafted with comprehensive terms.
Typically, the lessee in a commercial lease is responsible for the repair and maintenance of the internals of the tenancy (walls, floors, fixtures, and inclusions), while the lessor is responsible for the building itself, the roof, walls, parking areas, and amenities such as air-conditioning. When an item could fall into either the lessor or lessee’s area of responsibility (such as a cool room that services multiple tenancies), it is vital that the lease explicitly sets out responsibility for maintenance and repairs during the term of the lease.
An inspection and condition report before entering the lease can help flag maintenance and other issues that can be addressed, or negotiated, before the lease is entered.
Leasing disputes typically arise because the parties do not fully understand their rights and responsibilities under a lease agreement, or a written lease is non-existent, incomplete, or ambiguous. Investing time and effort to have your commercial lease professionally prepared, negotiated, and reviewed before allowing or taking possession of premises can minimise potential disputes, business interruption and financial loss.
If you need assistance, email [email protected] or call 02 8999 1080 for expert conveyancing and property law advice.