Elements of a Commercial Lease

Nature of Premises

You need to be satisfied that the property you are leasing is adequate for your business needs. Leases to which the Retail Leases Act applies must state the lettable are of the shop being rented. Shops and retail outlets often need to be fitted out before you can trade. Plant and machinery need to be fitted in factories before production can begin. You should try and negotiate some rent free time or for a lower rent for the time it will take you to get your business set up and running. If you are leasing in a shopping centre it is important to know what rights and obligations you have in regard to common areas, hours of operation, access by the public, loading and receiving facilities.

Terms of the Lease

The term of the lease is a vital issue. Under the Retail Leases Act, unless you agree otherwise, the minimum term for a lease is 5 years. You may choose to have less but this time will only be shortened where a solicitor provides a certificate that the tenant agrees to this. Otherwise the term is fixed at 5 years. When starting out, you may wish to see how matters progress over time.  In this case it might be prudent to take the lease for a relatively short time and then have an option for a further term if the business is successful. Many commercial leases are for a term of 3 years with an option for a further term of 3 years. Where the lease provides an option for renewal, great care is needed in observing time limits. The lease will provide times for which notice of intention to exercise an option is to be given. Those times are generally essential and failure to comply may result in the landlord refusing to grant a renewed lease.

Rent and Other Outgoings

Whilst rents for shops to which the Retail Leases Act applies are not regulated as to amount, the method by which rent can be increased is. Rent can only be increased either by a review to market, a nominated percentage or, by the Consumer Price Index (CPI). Outgoings refer to various expenses of the landlord to which the tenant is required to contribute. These are for such matters as the landlord’s rates, water rates and insurances and are in addition to the rent. The lease must identify the outgoing to which contribution must be paid and the percentage payable. Rents and outgoings for other forms of commercial leases are not regulated as to amount or the manner which they can be increased. Rent payments can also be subject to GST. Payment of this is often passed on to the tenant. The lease document needs careful consideration as to how rent and outgoings are calculated and how they may be increased. Turner Freeman can provide you with detailed advice in regard to these matters.

Lease Permits

Generally speaking, a landlord gives no guarantees as to what the property may be used for. A prospective tenant will, firstly, seek the landlord’s approval for the use which they propose for the premises and, secondly, obtain whatever approvals are necessary for this use. Land zonings should be carefully checked to ensure the use permissible. The development consent from the local Council is very commonly required. Even a shop fit out requires Council’s approval. Many industrial uses are also controlled by other regulatory authorities such as the Environmental Protection Authority and specific licenses may be required to carry out the proposed use. It is the tenant’s responsibility to ensure all necessary consents are obtained.

Repairs and Maintenance

Before a tenant moves into leased premises it is prudent for an inspection to be undertaken to establish the state of repair and condition of the building. A tenant is required to keep the property in the state of repair and condition it was in at the start of the lease subject only to reasonable wear and tear. A detailed record of the condition of the property can avoid arguments at the end of the lease. Any damage to the property by the tenant whether deliberate, accidental or by neglect, is to be repaired by the tenant at their cost. To fail to do so can be a breach of the lease. Generally, structural repairs and replacements are the responsibility of the landlord. At the end of the lease the tenant is entitled to remove their fixtures and fittings but must restore any damage done in doing so.

Insurance Requirements

If the lease is for a retail shop, the tenant will be required to insure their own property and stock have Public Risk insurance in place and insurance for replacement of plate glass. Employees of the tenant must also be covered for Workers Compensation. The lease requires these insurances to be kept current during the term. Factory leases often require special insurances to cover particular risks arising from the use of the property. A tenant is obliged to produce copies of the policy and evidence of currency if the landlord asks for this. Failure to observe these requirements can be a breach of the lease.

Termination of Lease

It is important for a tenant to be able to transfer their lease. By doing so, their business can be sold and often the remaining term of the lease can have a major effect on price. The landlord must agree to the transfer and will generally require the proposed new tenant to demonstrate that they have the financial resources and the ability to run the business before agreeing. It should be remembered that there can be pitfalls when a lease is transferred. Even though the landlord may have agreed to the transfer, this may not relieve the outgoing tenant of their obligations under the lease and they may remain liable if the new tenant defaults. The Retail Leases Act gives some protection in this regard but there is specific procedure to be followed. Other commercial leases give no such protection. Great care is needed when transferring a lease and professional advice should be sought. Leases are also subject to forfeiture by the landlord if the tenant fails to carry out their obligations.