If you need a premises to run your business, it is likely you will need to enter into a commercial or retail lease. Signing a commercial lease is a significant financial investment for a business owner. A conveyancer with commercial leasing experience can help by reviewing the lease prior to signing.
Similarly, if you own commercial or retail premises that you rent out, you will need a carefully drafted lease agreement with suitable terms and conditions to ensure your investment is protected. If the premises is subject to retail leasing legislation, your leasing arrangements will be governed by the relevant retail legislation in your jurisdiction, and you will have certain disclosure obligations. We can advise you of your responsibilities in this regard.
Considerations for lessees before signing a commercial lease
If you propose entering into a commercial lease to run your business, you will want to ensure are that:
- the leased area is clearly identified – this should be shown on a plan with arrangements for the use of common areas like parking, storage, and amenities clearly outlined
- relevant approvals/licences are in place or can be obtained
- you are aware of any restrictions regarding the erection of signage
- the commercial provisions (the length of the lease, options to renew, the rent and rent increases, etc.) are suitable for your business plans
- your legal rights are protected and there are provisions to address a range of contingencies or unforeseen events
Lease term and options
Commercial leases are generally over a longer term than residential leases. This can be of benefit to both parties: the landlord obtains a long-term tenant, and the tenant does not have to worry each year about the disruption of having to move business premises. However, a business owner who is considering entering into a long lease needs to think carefully about how the needs of the business might change over time. In particular, it is important that the lease allows for the tenancy to be transferred to a new owner if the business is sold during the term.
Rather than signing an overly long lease, it is common for a commercial lease to contain an initial term with an option to renew. For instance, if a business anticipates needing the leased premises for at least six years, it may prefer a three-year lease with an additional three-year option (or a two-year lease with two options, each for two additional years). If things change for the tenant during the initial term, then it can exit the lease at the end of the term. Alternatively, if the tenancy is still suitable for the business, the tenant has a protected right to renew, as long as it continues to meet the obligations of the lease and exercises the option in accordance with the lease agreement.
Fixtures and fit out
Commercial leases often include fixture and fit-out provisions. These set out details of any permitted modifications the tenant may make to the premises, who pays for the modifications and whether the tenant will need to return the premises to its original condition at the end of the lease.
This is an area where negotiation can result in better deals, saving your business money upfront and ensuring ongoing profitability because of the suitability of the commercial setup. Some leases provide a rent-free period during a specified period for fitting out.
It is usually the tenant’s responsibility to return the property to a good condition at the end of the commercial lease, which could mean removing all internal fit out and leaving the property as an empty shell. Again, negotiation at the start of the lease can be vital to preventing future headaches. The lease should be very specific about what is required of the tenant at the end of the commercial lease.
Repairs and maintenance
Repairs and maintenance are some of the common areas for conflict during the term of a lease. Most disputes can be avoided if, at the outset, the lease is well drafted and comprehensive. If the proposed lease is unclear or silent as to repairs and maintenance, it is important to negotiate the inclusion of suitable terms, so the parties are on the same page.
A prospective tenant should consider obtaining a full condition report for the property before entering a commercial lease agreement. This report can identify issues which may later result in the tenant incurring unnecessary costs for repairs and maintenance, such as blocked drains. If an issue is identified in the report, the tenant’s conveyancer can negotiate for responsibility to shift to the landlord for any repairs or maintenance flowing from the condition.
A well-drafted commercial lease with clear terms puts the parties on the same page at the beginning of the relationship and helps avoid leasing disputes down the track. We can assist with drafting, reviewing, and negotiating the terms of a proposed lease agreement as well as lease renewals, transfers, assignments, and sub-letting.