Avoiding Pitfalls in Commercial Leasing

Posted 10-11-2014
Written by admin 101

Standard commercial lease agreements are long and complex because they need to protect the landlord and the tenant for the duration of the lease.

The lease needs to plan for what might happen over that time, because a forward thinking agreement can mitigate potentially serious issues that may come into play in the future.

A lease grants a tenant exclusive use of a property for a period of time in exchange for rent. Subject to the terms of the lease, the tenant can exclude all persons (including the landlord) from having access to the premises, although landlords usually seek to reserve the right to inspect their property.

Some elements of a lease to consider:

Terms: The duration of the lease is an important consideration. Negotiate flexibility into the term and options of the lease to suit your business circumstances.

Rent: Payment of rent in exchange for the right to occupy a premises is an essential element of any lease. Landlords have the right to terminate a lease of a tenant who falls into arrears with rent payments and deny them access to the premises. The landlord’s right to terminate the lease and take possession of the property will usually be contained within an express clause.

Outgoings: The lease document is a written agreement of the type of outgoings a tenant will be liable for and the percentage of those operating expenses they will need to pay. As with residential leases, these outgoing costs may include water rates, land tax, management fees, strata or other levies and council tax.

Bonds: While there is no legislative requirement, most commercial leases typically include a bond agreement. The amount, the conditions for the use, withholding and repayment of the bond is decided between the tenant and the landlord. The lease also needs to specify when the bond will be returned to the tenant after the lease has ended and under what circumstances the landlord can withhold funds from the bond.

Fixtures: Tenants generally pay the cost of installing shop fixtures and fittings. When the lease has ended, tenants usually remove the fit-out and return the shop to the condition it was in before the lease began. Check that your commercial lease agreement contains an inventory of the landlord’s fixtures and fittings and your right to install and remove fixtures.

Maintenance: The commercial lease agreement should also clearly outline what repairs and maintenance the tenant is responsible for and what is the obligation of the landlord. Often the tenant is responsible for general repairs and maintenance and the landlord is responsible for structural defects and repairs.

Refurbishment: Some leases require the tenant to refurbish the premises at regular intervals and while it benefits the tenant’s business, it can also come at a significant cost. Make sure that the lease clearly sets out the nature, extent and timing of the refurbishment and limit this to an agreed timeframe you feel comfortable with.