Property that is used for industry with the intention of making a profit is considered commercial property. If you’ve been renting commercial property or renting one out to another party, it’s common practice to have a Lease Agreement in place to set out the details of your arrangement.
However, there may be situations where you don’t have a Commercial Lease Agreement. In this case, what exactly are your rights?
What Is A Commercial Lease Agreement?
A Commercial Lease Agreement is a formal, legally binding contract between a landlord and a business (in this case, they’d be the tenant). A Commercial Lease will give the business full use of the property for an agreed period of time. This formal agreement sets out the rights and obligations of both parties during this relationship.
For example, depending on the arrangement, it would cover some of the following things:
- Duration of the lease
- Exclusive right to use that property
- Subletting rights
- Repairs and maintenance
- Terms for ending the lease
- Fit-out works
- Dispute resolution
Commercial Lease Vs Residential Lease
Whilst commercial and residential leases are both largely governed by statute, common law and implied terms, the key difference is the use of premises. This generally refers to whether you’re a business or not.
More importantly, each commercial relationship is different. Whether the premise will be used to run a bar or a hair salon, you’ll want to have a strong Commercial Lease that covers all grounds of your specific arrangement. For example, if you’re worried about whether you can sublet to other parties, you want to make sure you have a say in how this is set out in your agreement.
Why Do I Need One?
A Commercial Lease Agreement is not as restricted by law as other areas of business. The tenants and the landlord determine the terms of the contract privately, such as rent rates and duration. However, in some cases, the Retail Leases Act (which operates in each State) may play a minimal role in regulating your commercial lease.
Therefore, it’s imperative to have an expert survey the property, negotiate the terms of the lease and ensure the agreement works in favour of your business venture.
While we can’t negotiate with the other side, our lawyers are happy to review and suggest terms that you can then negotiate within the lease.
What Happens If I Don’t Have A Commercial Lease?
Like any other business transaction, the absence of a contract or some written agreement means you might not be entitled to certain rights. If something goes wrong during your lease (for example, let’s say there has been terrible flooding which has damaged your premises), then you would usually rely on clauses in your Commercial Lease to decide how to respond to that issue.
Using the flooding example, a fair solution to include in your Agreement would be to have the cost of repairs reimbursed by the landlord. However, without a Commercial Lease, there wouldn’t be any written agreement as to how this would be settled, and you and your landlord are likely to have some trouble figuring out a solution that you both agree on.
Another example is lack of clarity around terminating your lease. Let’s say you’re 3 years into your 5 year lease – what happens if you want to leave early? If you don’t have a Commercial Lease, there would be no set procedure around this, and it would be a difficult process to negotiate with your landlord.
If your agreement was verbal and not in writing, then it’s much harder to claim your rights as a tenant. It’s also difficult to enforce any legal issues that might arise later down the track.
Like we mentioned, Commercial Leases are not as regulated by statute, so most of your rights and entitlements will come from your written agreement. The Real Property Act 1900 (NSW) states that if you want to have a lease, you’ll need to execute it in an ‘approved form’.
What Should I Look out For When Creating A Commercial Lease Agreement?
As mentioned previously, almost all of the terms in a lease are negotiable. The benefit of this is being able to create an agreement that is uniquely beneficial for your business.
When negotiating a lease agreement, it’s important to have the following in mind:
A lease agreement should set out the process for dispute resolution. When disputes between a landlord and tenant are difficult to resolve, a common option is to bring the matter to the NSW Civil and Administrative Tribunal (NCAT) This would involve a process of mediation, which is often cheaper than bringing it to court.
A lease agreement contains all the relevant rights and obligations in writing, therefore making some disputes easier to resolve.
Ending The Lease
Commercial Lease agreements, like any other lease agreements, state the end date of the lease. Generally, Commercial Leases are longer than other types of leases. For example, a residential lease may be for one year while a Commercial Lease can be for 3 to 5 years with an option for renewal.
This is largely due to the fact that a business will have greater interest in occupying a space that works for them for longer periods of time.
Most termination clauses, however, allow the parties to terminate the agreement with a certain notice period. This is usually beneficial to the landlord’s interest, however, not so much to the interest of a business.
It’s important to take this into consideration and create a termination clause that will not harm your business if the landlord decides to end the agreement.
Repairs And Maintenance
A good lease agreement should clearly state who is responsible for repairs and maintenance. As a general rule, a landlord will be responsible for any structural repairs to the property such as plumbing. A tenant, on the other hand, will need to take care of general maintenance such as cleanliness and changing light bulbs.
It’s important to have the property thoroughly surveyed and the terms of the contract unequivocally staging the responsibilities of each party.
Rent is one of the main aspects of a lease agreement. For a commercial property, there are additional considerations such as rent abatement and rent reviews. If the latter is of interest to the landlord, it should be included in the contract with a specific time period to review the rental price. Landlords may also offer rent abatement to businesses, the terms of which will be unique to the arrangement.
There will also be additional costs along with the rent. Look out for bond payments, insurance coverage, legal fees, fit-outs and refurbishments.
A lease agreement might also contain a clause around outgoings. These are additional costs that the tenant covers in addition to rent, so this could include cleaning fees, repairs and taxes. If you see this in your agreement, this means you’ll be liable for these costs.
The contract should clearly disclose these so the overall cost doesn’t take you by surprise.
Subleasing or subletting a lease happens when a tenant leases out the space they are renting to another sub-tenant. The landlord of the property would consent to this and it will usually be included in a lease agreement.
If you are thinking of sub leasing a property or part of a property, it’s best to have it in writing. You may also be liable for any damages the third party does to the property. Ensure the lease agreement is clear on any responsibilities surrounding subleasing.
Sandy is planning on renting a small office space from Patrick to run her consultancy firm. Sandy has a lawyer come and survey the space for her. Upon seeing the property, Sandy is advised about a leak in the roof. The water had resulted in mildew which could make Sandy and her clients very sick.
Sandy alerts Patrick of the situation who disagrees with Sandy, stating that as she is going to be the one leasing the property, it’s her job to fix it. Sandy disagrees and says that if she is going to be a tenant of Patrick’s, he needs to take care of any structural damage and she will do general maintenance.
Sandy’s lawyer drafts a Commercial Lease Agreement that specifies the duties which are regarded as structural maintenance and the tasks that account for general maintenance.
Not wanting to lose a tenant, Patrick agrees to the terms of the contract. During the course of their relationship, any disagreements regarding maintenance of the property were quickly resolved after they referred back to the agreement.
Getting the right property and having a strong Commercial Lease are vital factors in running a business. You want to have your space set up and the rental agreement working for you, so you can focus on running the business.
If you don’t have a Commercial Lease Agreement, this could mean bad news for your rights and legal standing as a tenant.
Therefore, it’s important to get a lawyer involved to ensure that all your needs and rights are covered in the lease agreement.
At Sprintlaw, we provide a package that covers your Commercial Lease agreement needs. Contact our team today to find how we can help you.
If you would like a consultation on your options going forward, you can reach us at 1800 730 617 or firstname.lastname@example.org for a free, no-obligations chat.
Our expert lawyers can help.