As a tenant, entering into a commercial lease will be one of your business’ most important legal contracts. It will impose an array of legal and financial obligations on you for a period of several years and your landlord will be one of your largest and most well secured creditors. It is somewhat surprising then that few tenants will obtain legal advice prior to entering into a commercial lease, despite landlords almost universally engaging lawyers to act on their behalf in such transactions. This article is designed to inform tenants of some of the key obligations that commercial leases will impose on them and some potential pitfalls for tenants to be aware of when deciding whether to enter into a commercial lease.
Commercial Leases: Retail vs. Non-retail
'Commercial' leases is the umbrella term that describes all leases other than residential leases. Within this umbrella term, commercial leases can be divided between 'Retail' leases and 'Non-retail' leases. Retail leases are those under which tenants enjoy the protections of the Retail Leases Act 2003 (Vic), which is a piece of Victorian legislation designed to somewhat level the general power imbalance between landlords and tenants. The Retail Leases Act will apply to premises that are used by the tenant for the sale of retail goods or services to the public, for example: a cafe; a clothing shop or a hairdressing salon. The Retail Leases Act provides tenants with many valuable legal protections against landlords and also entitles tenants to receive a Disclosure Statement from the landlord before entering into the lease.
Non-retail leases are those leases which are used for commercial purposes but which are not retail purposes. Examples of non-retail purposes are: a factory used for storage of goods or equipment; a warehouse used for wholesaling of clothes or other goods; and administrative offices which are not open to the public. Tenants entering into non-retail leases do not enjoy the protections that Retail Leases Act offers to retail tenants, so it is vital that tenants secure all the rights that they can from the landlord before the lease is signed when their lawyer is negotiating the terms of the lease on their behalf.
Why engage a lawyer?
Money is often tight when commencing a small business and it is tempting as a business savvy person with a general understanding of business contracts to attempt to personally negotiate the terms of the lease with the landlord (or the agent) and do the deal yourself, saving on legal fees. However, commercial leasing law is a complicated area and it involves aspects of property law; contract law; tenancy law and also experienced negotiation skills. From experience it is usually a smart choice from both a financial and legal perspective to spend a relatively small amount of money on a lawyer to act on your behalf to review any proposed lease before you sign, rather than to bring a problem to your lawyer after you sign and when you can be legally stuck in a very difficult situation. Think of it like an insurance policy designed to provide you with guidance and peace of mind through a difficult and important transaction.
Potential pitfalls
On top of paying rent, tenants will almost always be required to pay the landlord's outgoings in relation to the premises. Usual outgoings will include council rates, water rates, building insurance, owners corporation insurance and, for non-retail premises, the landlord's land tax. Outgoings will generally be an additional 10% on top of the annual rent amount and often tenants will not have an accurate idea of the outgoings until after the lease is signed.
There are strict timeframes that rent and outgoings payments must be made to the landlord and if those payments are late the landlord is entitled to charge a tenant interest, usually at a rate above 10% per annum. Further, lease terms generally provide landlords with several rights to terminate the lease on short notice if a tenant has breached its obligations under the lease; for example for non-payment of rent. Having a lease terminated by a landlord can potentially have devastating legal and financial consequences on you and your business.
In addition to your payment obligations under a lease, a tenant also has various other obligations in relation to the maintenance of the premises. As a general rule, tenants are required to 'make good' the premises before it is returned to the landlord at the end of the lease. This can include repainting all painted surfaces and refinishing all finished surfaces in the interior and exterior of the premises; removing any partitions installed as a result of re-fitting the premises for the tenant's use; removing all of the business signage on the exterior and interior of the premises and replanting any trees in the gardens of the premises which have been removed. It is often a wise idea for a tenant to compile a detailed condition report of the premises before the lease commences to minimise the possibility of disagreement between landlord and tenant in relation to the tenant's 'make good' obligations at the end of the lease. Tenants should be aware that a failure to 'make good' the premises will leave a tenant open to having the bond forfeited to the landlord and could potentially result in legal proceedings being issued by the landlord to recover the landlord's loss and damage suffered.
Recommendation
In order to give your business the best possible chance of success it is vital that you know your rights and obligations under a commercial lease and that you negotiate good commercial terms with the landlord. Engaging a lawyer to advise you on your proposed commercial lease before you sign it will allow you to do that.
Note: this article provides only general advice in relation to Leases in Victoria and does not constitute professional legal advice. The laws of other States are different and you should engage a lawyer who practises in the State in which you wish to lease a commercial premises to advise you.
Article contributed by Andrew Cocks from Local Lawyers.