Key issues Tenants should consider in relation to a Commercial Lease

Leases can have significant implications on your business from both an operational and financial perspective. Accordingly, we have considered key issues that tenant’s should contemplate before they sign their lease agreement.

1. Applicability of the retail leasing legislation

Commercial leases are considered either a retail premises lease or a non-retail premises lease. It is beneficial to enter into a retail lease since it has a wide scope and the legislation provides more protection to tenants than landlords. For example, the landlord cannot charge land tax or direct the tenant for reimbursement of the costs of preparing and negotiating the terms of the lease. The landlord can also not prohibit a tenant from assigning or sub-letting the premises, unless the landlord has a compelling reason such as the assignee not having sufficient financial resources or business experience to takeover the lease.

The law concerning what is and is not considered retail premises is complex. You should seek legal advice as to whether your lease falls within the definition of “retail premises”, irrespective of what the lease expressly states.

2. Unequitable contract terms

A provision is considered to be “unfair” or “unequitable” if it provides one party with significantly more rights than the other, or if it restricts one party more onerously than the other. Generally, provisions that are considered unfair include restrictions on tenants to claim compensation from the landlord for landlord breaches, or mandatory appointment of the landlord as the tenant’s power of attorney if they default on the lease, or rights to the landlord to grant an easement over the premises.

Generally, landlords will include more favorable terms to protect their own interests, in the ‘Additional Provisions’ section of the lease. Accordingly, a review of your lease and any Additional Provisions is critical.

3. Heads of Agreement

Generally, parties will negotiate a document known as a Heads of Agreement before any formal lease is drafted. If a Heads of Agreement is entered into (which has pros and cons), in our view, it is critical to assert the key terms you want included in the lease in the Heads of Agreement before the formal lease is prepared. It is far more difficult to amend the formal lease once a position has already been reached in the Heads of Agreement. For that reason, it is important that you do not sign a Heads of Agreement if there are terms in that document that you are unsure about or require legal advice on. Refer to our article ‘Heads of Agreement: What you need to know! ’ for further information.

4. Key terms of the Lease

Care must be taken in drafting/reviewing fundamental terms of the lease agreement to ensure that they reflect the agreement reached and meet the intention of both parties. The key provisions include:

  • Term of the Lease i.e. what is the period are you leasing the premises for?
  • The permitted use of the premises i.e. what do you intend to use the premises for? Do you want this to be a limited use or more broad in case you change your intended use of the premises?
  • Rent review i.e. when will the rent be increased for the premises and what is the method that will be used.
  • Outgoings payable under the lease/how are they calculated?
  • Tenant’s obligations under the Lease including obligations such as the requirement to paint the premises every three years, re-polish floors, window cleaning every three months, make-good obligations when the lease ends etc.
  • Landlord’s right to terminate the lease to develop the premises.
  • Right of the tenant to assign or sub-let the property.
  • The rights of the Landlord where the Tenant is in breach of the lease.

5. Security

The tenant will ordinarily be required under the lease to pay to the Landlord a cash security deposit or bank guarantee, as security for the tenant’s performance of its obligations under the lease. A security deposit is not a defined amount and may be negotiated between the parties for example, an amount equivalent to three months’ rent inclusive of GST. Alternatively or additionally, where the tenant is a company, the landlord may require a personal guarantee be given by the directors of the tenant, as security for the tenant’s performance of its obligations under the lease. Giving a personal guarantee for a leasehold interest may be a considerable undertaking and the directors should give this careful consideration before agreeing to it and ensure that they understand the risks.

6. Mortgagee’s consent for registration of Lease

Where there is a mortgage encumbering the Title to the premises, the parties must obtain the consent of the mortgagee. It is usually the landlord’s responsibility to get this consent, but the tenant may be required to reimburse the costs incurred by the landlord. A tenant should ensure that mortgagee consent is obtained as, if the landlord defaults in its obligations under the mortgage, the mortgagee may have rights to take over possession of the premises without the tenant’s consent.

Before entering into a lease, it is important that you understand your rights, obligations and the risks. As a tenant, unless agreement has already been reached on specific terms, you do not need to sign a lease as prepared by a landlord’s solicitor and we recommend that you seek legal advice and consider negotiating terms that are unfavourable or onerous on the part of the tenant.

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