Leasing premises is a significant financial commitment and what many tenants don’t understand is how complex a commercial lease can be and how a tenant can end up facing financial or legal difficulties down the track. Therefore, it is vital that before entering into a commercial lease agreement you review every clause in it and seek help from an experienced lawyer who can negotiate the lease for you.
This article provides a summary outlining what a commercial tenant should consider before entering into a commercial lease and how tenants can save a lot of money negotiating through a lawyer.
What’s the difference between a commercial lease and a retail lease?
Different laws apply to commercial leases and retails leases. Retail lease legislation (i.e. the Retail Lease Act 1994 (NSW)) imposes significant obligations on retail landlords and provides protections to retail tenants. Commercial leases, on the other hand, are not as protected and don’t have the security of commercial-tenant-specific legislation.
Generally, a lease will be a retail lease if the premises is in a shopping centre. Although, there are exceptions to this rule and different states and territories have different Acts regulating this.
Commercial tenants should consider the following key issues before entering into a commercial lease agreement
- What is the permitted use of the premises?
It is important that you contact the local council to make sure that your proposed business is zoned for the leased premises.
You may be able to lodge a development application proposal (“DA”) with the council to have your proposed use of the premises changed but it is more cost effective to go into a lease where the use is already approved. If a DA is required, you should make sure that your lease is conditional upon the approval so that if the council rejects your application, you are not obliged to enter into the lease.
Who is responsible for the fit-out of the premises?
Fit-out includes installing things such as wall and floor coverings, removing the existing partitioning, carpet, cupboards, reception areas and so on. It is a process of preparing the premises for occupation as required by the tenant and agreed to by the landlord.
It is possible to negotiate who is responsible for the entire fit-out or parts of the fit-out. The lease should specify the fit-out requirements and who will be responsible for the associated costs. If you, as a tenant, are responsible for the entire or part of the associated costs, you should try to negotiate as much as possible so that the fit-out items you purchase will remain your property at the end of the lease and you might also consider negotiating a rent free period.
In addition, matters such as who is responsible to make good the premises at the end of the lease and periodic decorating should also be agreed between the parties and specified in the lease.
Legal costs associated with a lease
While retail lease laws prohibit a landlord from passing on legal costs associated with a retail lease’s drafting to a tenant, commercial leases do not have the same protections. This means the landlord may try to recover costs from you for preparation of the lease.
It is suggested that you negotiate with the landlord that each party bears their own legal costs or, at the very least, try to negotiate a cap on your contribution to the landlord’s legal costs.
What is a security deposit?
You are likely to be required by the landlord to provide a bank guarantee or security deposit at the commencement of a commercial lease. This is usually 3 months’ rent and may be used by the landlord to cover damages if you default your lease or damage the premises.
A bank guarantee requires the tenant under a lease to obtain a binding undertaking from a financial institution that guarantees the tenant’s deposit liability under the lease. The bank will ordinarily establish a term deposit in the amount of the deposit under the lease and will lock that term deposit pursuant to the terms of the bank guarantee. Often there is an issue related to wording of the bank guarantee and you should make sure your landlord prescribes the exact wording required for the guarantee.
If a bank guarantee is used the tenant should ensure that there is documented agreement as to the state of the premises being leased at the time of giving the bank guarantee.
A security deposit is different to a bank guarantee in that it requires the tenant to give to the landlord a sum of money to be held on trust and on account for the deposit required under the lease. A landlord should give security deposit tenants a receipt that states:
- the name of the person receiving the deposit (and if there is an agent, the name of the landlord);
- the amount paid;
- the date on which payment was received;
- the intended use of the payment; and
- the signature of the landlord or agent.
If a security deposit is used the tenant should ensure that there is documented agreement as to the state of the premises being leased at the time of giving the security deposit.
Maintenance requirements during the lease
The lease terms should clearly specify responsibilities for repairs and maintenance. You should try at the very least to negotiate for the landlord to be responsible for maintenance of the structure of the building.
Furthermore, equipment such as air-conditioners and fire sprinklers should be negotiated between the parties and you should try to negotiate for the landlord to replace them when their useful life span is over. Ordinarily, the day-to-day maintenance of your premises is your responsibility.
Responsibility for outgoings
Outgoings are the landowner’s reasonable expenses associated with the premises, and they might seek to pass these on to the tenant in the lease. Examples of outgoings include rates, water, electricity, gas, telephone charges and so on.
Therefore, it is a good idea to negotiate with the landlord in relation to who shall pay for a particular outgoing and the person should be specified in the lease.
Is stamp duty payable on the creation or assignment of a lease?
Stamp duty is generally not payable on the registration of a commercial lease. However, you should always check stamp duty requirements with your lawyer.
Register your lease
In NSW, a lease for a term in excess of three (3) years must be executed in an approved form and the lease must be registered. Registration cannot take place without the consent of the mortgagee if there is a mortgage registered over the title of the leased premises.
The Dowson Turco property team has decades of experience advising both landlords and tenants in small and large lease negotiation. We have saved our clients substantial sums through commercial negotiation on their behalf and will be happy to assist you.
If you have questions about a commercial lease you should contact DTL’s commercial team on 02 9519 3088 or firstname.lastname@example.org