A commercial lease governs the relationship between a landlord (lessor) and tenant (lessee) regarding the lessee’s right to occupy premises owned by the lessor.
A retail lease is essentially a commercial lease for premises that fall within the definition of ‘retail’ under specific leasing laws designed to provide greater protection for lessees. These leases are regulated by legislation. Lessors must provide prospective tenants certain disclosure documents, follow specific processes, and ensure that the terms of the retail lease comply with the regulations. Failure to do so can have significant consequences and may be grounds for a lessee to terminate a lease.
Commercial leases involve large sums of money and are valuable to both lessors (who rely on adequate protection of and returns on their investment) and lessees (who rely on reasonable terms and security of premises to operate a business). The parties should obtain professional advice to ensure their negotiations are properly reflected in a lease agreement that balances their rights and obligations.
Essential terms of a commercial lease
Leases should be in writing, compliant, and contain all negotiated terms which will typically include, but are not limited to the following.
- The parties and property – parties entering a lease need to know who they are dealing with. Title and company searches will confirm that the parties are accurately described and legally entitled to enter the transaction.
- The leased area – a legal description of the premises as well as the street address including building names and shop or unit numbers. The lease should include a floor plan showing the area and location of the subject premises with use of car spaces, storage facilities and amenities also noted. This is particularly important where the premises forms part of a larger space or includes common areas.
- Permitted use of premises – the lease should state the permitted use of the premises and the lessee should ensure the proposed use complies with any Council or other requirements and any necessary licences are obtained.
- The term of the lease – the lease term and any renewal options should be considered with reference to the lessee’s business plans and the lessor’s investment strategy for the property.
- Options – leases containing options to renew will set out a time period within which a lessee can exercise (give notice) of the option. Option periods should be diarised to avoid missing out on renewing the lease.
- Outgoings – may include utility services, certain repairs and maintenance, rates and taxes, cleaning, gardening and security. Subject to restrictions under retail leasing legislation, the tenant may be responsible for all or a proportion of outgoings and an estimate of these costs should be obtained by the tenant before entering the lease.
- Rent and rent reviews – the lease will contain details of the rent, the frequency and method of payment and when and how a rent review may take place. Rent reviews may be by reference to the Consumer Price Index, market review or a set percentage on each anniversary of the lease.
- Fit–out – negotiations may include allowances for fitting out the premises for the lessee’s proposed use. The lease should set out the type of work permitted, who is responsible to pay for it and what happens to the fittings on termination of the lease (for example, whether the lessee must restore the premises to its original condition).
Parties should also understand their rights and obligations with respect to insurance, attending to repairs and maintenance and contributing to capital works. Provisions to assign or sublet the lease, should the tenant seek an early release from its obligations, should also be considered.
Lease disputes generally arise when the terms of a lease are poorly drafted or ambiguous, or the parties are not properly informed of their legal obligations. Obtaining independent legal advice before entering a leasing arrangement can help minimise the potential for costly leasing disputes and is a positive step towards creating a good ongoing lessor/lessee relationship. Our Lawyers will walk you through the leasing process, negotiate the terms to best protect your interests and provide comprehensive advice on your rights and responsibilities.