So you've been renting your house for years and you want to rent a commercial space for your new business? The leases should be similar right? Wrong, there are significant differences in the lease agreements themselves and in the protections you are offered for your home vs your business.
Most people starting a new business look at commercial property leasing armed with their experience of the residential rental. Leasing a commercial property does have a few similarities but there are some vast differences to consider.
Commercial leases tend to be a lot more complicated than residential leases. They are much longer, anything from 3 years to 20 years, typically with an option to extend the lease each year. Rent is reviewed annually and is normally increased by either CPI or by 4% year on year which ever is greater. Commercial leases are harder to break than residential agreements, however, in many cases a landlord can use a standard form for residential leases because there is little need to accommodate different tenant requirements. Residential leases are normally shorter in length, readily renewable and are easier to rent than commercial properties.
Negotiating the lease terms
Legally, a commercial tenant is presumed to be on equal footing with his/her landlord in negotiating a commercial contract, unlike the residential tenant.
The lease between landlord and tenant varies significantly between each commercial property. Terms and conditions will be different for the same property depending on the needs and negotiating power of the tenant. Terms subject to change include the rent amount, rent increases, the length of the lease, the ability to assign a lease and allowable improvements.
Commercial leases have the added protection for the owner's in the form of a make good clause, maintenance clause and management clauses. Consumer laws that apply to residential lease agreements do not cover commercial leases. State laws provide less consumer protection against deceitful landlord practices because state lawmakers assume that business people are more knowledgeable.
Historically as a tenant of a residential property you are protected against unscrupulous landlords and could seek a dispute resolution with services such as the Victorian Civil and Administrative Tribunal. VCAT's purpose has been to provide Victorians with a low cost, accessible, efficient and independent tribunal delivering high quality dispute resolution. As of July 1st 2014 VCAT merged domestic buildings, retail tenancies and real property lists together to handle the same types of disputes for commercial building lease disputes as were previously handled for domestic tenants.
In New South Wales you can seek assistance from NSW Fair Trading. In dealing with disputes for commercial properties you may need to seek legal advice or the services of your state's Small Business services, such as the Office of the NSW Small Business Commissioners Dispute Resolution Unit.
They provide information and strategic advice about any small business dispute, whether retail or commercial leasing, business-to-business, or business to Government.
Queensland retail tenants are also offered dispute assistance in the form of mediation or if there is no resolution at the mediation than a hearing can be provided by QCAT.
A landlord of a commercial property will calculate the rent amount based on the square footage of the premise or rate per meter. Variations exist with the property and are factored into the rates per meter, these include; location of the property, i.e. prime location/street level/top floor etc, quality/age of the building, car parking allowances, services, surrounding tenants and size. Commercial tenants pay for all outgoings unlike that of the home renter.
Residential rental rates are typically based upon a set amount per month varying from a month-to-month lease to a term of years. Rent for a residential property can be based on similar properties in the area and the rate is often an amount required to cover the owners mortgage payments, utilities, insurance, taxes and incentives such as free rent periods.
Tenants of commercial properties have a larger amount of responsibilities than residential. Most residential real estate is rented 'as is' with the landlord as the party who is required to repair and maintain the property. Landlords of a residential property need to allocate more time to manage the property, as these are usually a shorter lease length and a greater obligation for maintenance and repairs.
Commercial properties are routinely modified to suit the individual needs of the commercial tenant's business so the responsibilities of the landlord and tenant regarding tenant improvements need to be more specifically spelled out. As a rule of thumb, commercial tenants tend to maintain the property better as the look and condition of the property is important to their business and their staff.
Fit-outs are usually at the expense of the new tenant (unless provided as a sign-on incentive) and require the owners approvals before any works can commence. If you choose to vacate a commercial property you may be liable for payment of rent and ongoing costs if the new tenant cannot be found, this includes all rates and insurance.