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Are you a business owner considering entering into a commercial lease?
Entering into a commercial lease can be a great start or step forward for your business, however, understanding the elements of a commercial lease is important to make sure you are making the right choice for your business.
What is a commercial lease? How do you ensure you are getting the best lease for your business? Let’s break it down.
What Is A Commercial Lease?
A commercial lease is a contract setting out the rights and obligations of the owner of a property and the person who will occupy the premises.
The owner of the property is known as the landlord or lessor whereas the person occupying the premises is known as the tenant or lessee.
The term ‘commercial lease’ can be used in a general sense to distinguish them from residential leases. It can also be used in a more technical sense to distinguish them from ‘retail leases’, which are generally commercial in nature too.
What’s The Difference Between A Commercial Lease & A Retail Lease?
There is a legal distinction between commercial and retail leases. You’re usually looking at a commercial lease if no retail activity is taking place, such as warehouses, industrial spaces or office spaces.
Retail leases apply to premises where goods can be sold. Examples of places where retail leases exist include:
- Shopping centres
- Restaurants
- Grocery stores
- Clothing stores
In NSW, retail leases are governed by the Retail Lease Act 1994 (NSW).
Can Some Retail Shops Have A Commercial Lease?
In short, yes.
If a retail store is within a commercial premises, a commercial lease will exist.
While commercial leases and retail leases are generally distinct from one another, the distinction can become blurred. It is in these instances where a retail store may come under a commercial lease.
Let’s consider the following example:
| Example One: Annie leases a space in a commercial building. Annie’s business is a cafe at the bottom of the commercial building. While Annie’s business would usually come under the definition of a ‘retail business,’ because Annie’s cafe is within a commercial building, her lease will be considered a commercial lease. |
What Are The Elements Of A Commercial Lease?
1. Lease Duration And Options To Renew
When you enter into a commercial lease it is important that the duration of the lease is suitable to you and your business.
Ensuring that your commercial lease is for a suitable duration to your business is important to the longevity of your business’s success.
For example, having your business in one place for a long period of time can be beneficial to your clients and employees. Having a longer lease can also ensure that your business can capitalize on its investment and attain the relevant profit.
So, What Are Options?
In a commercial lease, there is generally an initial term and an option for renewal.
For example, you may sign a lease for 25 years where there is an initial term of 5 years and then an option to renew for a further 20 years.
Having an option allows you and your business to continue trading from the same location after the initial term.
Options can be written into your commercial lease from the outset and can assist in ensuring the stability of your business’s location.
You can exercise your option by informing your landlord generally between 3 – 6 months prior to the end of your initial term that you intend to extend your commercial lease. It is best practice to do this in writing.
A failure to notify your landlord that you wish to exercise your option could result in your commercial lease coming to an end.
2. Rent and Rent Reviews
As a business owner, it is important that you are paying the amount of rent that suits you and your business. When negotiating your commercial lease, determining what rent you pay will be of high importance.
Another element that you may find worth negotiating is the amount of rent reviews that will take place during your commercial lease. A rent review is when your landlord presents a new rent amount based on the present commercial leasing market. For example, one year you may be paying $1000 in rent per week, the next year you may be obligated to pay $1200 after a rent review.
Generally speaking, rent reviews usually take place once a year, but you may be able to negotiate these to be less frequent.
As a business owner, it is important that you are prepared to pay whatever rent is stipulated in your commercial lease. You should also be prepared for any rent increase upon rent reviews.
3. Permitted Use
Your commercial lease will usually outline what is ‘permitted use’ of the premises you are leasing.
It is vital that you ensure that your commercial lease agreement stipulates that your business’s activities are categorised as permitted use of the premises.
It is not only important to consider your current business activities but also your possible future activities and interests.
4. Tenants And Competition
Before committing to a commercial lease, it is important that you consider other tenants or competition that may be within the same commercial premises.
It is always a good idea to include an ‘exclusivity of trade’ clause in your lease to ensure that you won’t have any direct competition that may directly impact the success of your business.
For example, if your business is a cafe at the bottom of a commercial building, you will benefit from having an exclusivity of trade clause, ensuring that another cafe isn’t allowed to populate the bottom of the commercial building.
5. Costs
There are various costs that exist beyond your rent in a commercial lease. These include:
- Operating expenses or outgoing
- Insurance
- Any legal costs
- Security bonds
- Fit outs (fixtures, fittings, walls, floorboards, cupboards).
- Refurbishments
- Marketing and promotional funds.
These additional costs can certainly add up. It is a great idea to consider these additional costs before going into a commercial lease and determine which of these you may be able to incorporate or negotiate into your commercial lease.
For example, you may want to consider a commercial lease that already has fit outs installed into the property. Equally, you may want to negotiate that any necessary refurbishments are dealt with and covered by the landlord. If you are required to refurbish the premises, you may want to negotiate limiting the amount of times refurbishment is required throughout your commercial lease.
Further, when it comes to insurance, it is always important to consult your insurer to ensure that you are not contradicting any of your insurance policies by entering into your commercial lease.
6. Repair And Maintenance
Your commercial lease should clearly detail who is responsible for repairs and maintenance throughout your commercial lease.
Generally speaking, it is a good idea to try and negotiate that your landlord is responsible for repairs and maintenance of the structure of the building such as the roof, walls and air-conditioner.
You may be responsible for the internal repairs and maintenance such as the doors, windows and fixtures that you use such as cupboards or desks.
It is a responsible idea to get the premises independently checked for any wear and tear prior to your business occupying the premises.
7. Compensation For Disruption Caused By Landlord’s Works
Your commercial lease should stipulate that in the instance that your landlord carries out works on the premises your business is occupying, you are entitled to compensation.
For example, if your landlord’s works disrupt your course of business which in turn causes you to lose profit, you should be entitled to compensation for this.
8. Assignment And Sub-Leasing
When you enter into a commercial lease, there can be a clause that stipulates that you may assign your interest in the lease to another person or sub-lease the premises to another person.
If you assign your lease to another person, this means that you are essentially ‘handing over’ your interest in the lease. If you sub-lease the premises, this means that you will be sharing a proportion of the premises with a third party.
Generally speaking, if you assign your interest or sub-lease the premises you may still be liable if the new tenant defaults. You may also be required to pay the legal costs or insurance costs associated with assignment or sub-leasing.
Whether or not you intend to assign your interest or sub-lease the premises, you should be proactive and negotiate the relevant terms and conditions into your commercial lease in the event that it does occur.
9. Defaults and Breaches
If you fail to pay your rent, you will default on your lease. It is in the instance that your landlord can take action to recover the lost rent.
In some instances, landlords may be able to enter the premises and lock you out without any notice, if you default on your lease.
This is why it is important to consider negotiating fair default clauses when determining your commercial lease. It is a great idea to include that your landlord is required to provide you with at least 14 days notice to rectify the default before any action is taken against you.
10. Redevelopment And Relocation
In many commercial leases there is a redevelopment clause that states that if the landlord wants to end the lease early to redevelop the premises, they can do so.
This is clearly problematic for your business if the redevelopment was ever to come into existence.
As such, it is often a good idea to attempt to negotiate the redevelopment clause out of your commercial lease. If this is not possible, it is a good idea to negotiate redevelopment compensation and relocation costs.
11. Termination
There may be a clause in your commercial contract that allows your landlord to terminate your lease early. For obvious reasons, these clauses can be much more favourable to the landlord and detrimental to your business.
If possible, you may want to negotiate the clauses out of your lease or have them composed in a more favourable way to you and your business.
Need More Help?
Understanding commercial leases can be quite complex.
However, it is vital that you thoroughly understand and are across the ins and outs of commercial leases to ensure that you are making the right and informed choices for your business.
We’re here to help. Reach out to our team for a free, no-obligations chat at team@sprintlaw.com.au or 1800 730 61.
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