After last week’s article detailing advice for landlords negotiating new commercial leases, we look at the process from a tenant perspective.
Wading through the complexities of a commercial lease can be daunting even for an experienced lessee. But whether seasoned or a newcomer, any tenant needs pay attention to those details more likely to be the source of disagreements and expensive legal stoushes.
Commercial leases are lengthy, awash with clauses and each will have unique requirements. “Agreeing the commercial terms of a lease, such as the term, rent and rent reviews is only the first step,” says leading property law expert Melissa Potter, a partner with Sydney’s Bartier Perry Bartier Perry Lawyers | Welcome | Bartier Perry Lawyers . “The fine print of any lease should then be reviewed to determine whether amendments are required to protect a tenant against some of the more ‘landlord friendly’ clauses.”
Terms and conditions will differ depending on each individual premises depending on size, location, permitted use and so on. But there are certain areas to which lessees should pay particular attention:
Know your dates
The key days to mark on the calendar are the handover date, and the commencement date (often confused), renewal date and option period, and expiry or termination. The handover is when a new tenant is handed the keys to move in any equipment and/or start their fit-out. As for the commencement date, this is when the lease officially commences and - unless a rent-free period has been negotiated – generally when rent is first payable.
Equally important is to be aware of not only the date of the lease’s renewal but any option clause/s. An option clause refers to a term in a commercial or retail lease that permits a tenant to renew their lease, usually three to nine months before the end of the lease, and via written notice. Tenants should both review a lease’s option clauses before signing and diarise the relevant dates to ensure they benefit from the advantages it provides. Option clauses are not mandatory but common as they are in the interests of both parties. An example to the contrary would be where a lessee intends to move to a different style of premises by the end of the lease period.
The expiry or termination date is when the lease ends including any option term.
Make rent reviews work for you
Most leases will contain a clause stating that any market review will not result in the level of rent falling below that currently being paid. “These are known as ratchet clauses and unless the parties have knowingly agreed otherwise the tenant should try to have them deleted from a lease,” advises Ms Potter. “A true market review of the rent will allow the rent to increase or decrease. Also, provisions which require valuers when determining market rent to disregard incentives provided by landlords to tenants should be resisted.”
Decide who pays for what
Before entering any commercial lease, tenants need to determine with the landlord or leasing agent exactly which outgoings will be their financial responsibility. Then request this in writing. “An itemised estimate of outgoings should be obtained and a tenant may wish to negotiate an agreed cap on the amount of outgoings payable,” Ms Potter says.
Lease registration works in favour of a tenant
In NSW, commercial leases of three years or more are required to be registered with the NSW Land Registry – meaning that the lease, and therefore the tenant’s interest in the property under that lease, are both formally recorded on the title of the landlord’s property. This provides the tenant with statutory protection, especially important if a landlord sells. If a lease is registered, the new owner must adhere to the terms of the existing lease and cannot seek to alter or evict the current tenant. Leases under three years are automatically protected under the law, although they can still be registered should both tenant and landlord agree. Each state is different: in Victoria for instance all lessees with valid leases are protected by legislation regardless of the length of the lease.
Other tricky areas of which to be aware:
- Security deposits and bank guarantees – factor the costs of these into your business budget.
- Avoid a common cause of commercial disputes by ensuring the “make good” obligations at the end of your lease are watertight. A tenant needs to adhere to any conditions in the lease regarding the premises’ condition.
Help with leasing business premises | Service NSW
Change to Retail Leases Act effective 1 January 2023 | Small Business Commissioner (nsw.gov.au)
Lease a business premises | Business Victoria