The Nature of Commercial Leasing
Commercial leasing provides a tenant (lessee) with a right to occupy premises owned by the landlord (lessor) in exchange for rental payments and subject to conditions.
Leases are common commercial arrangements which provide businesses the opportunity to use premises for a specified time, in a location suited to their needs.
Commercial property can be a good investment choice and lessors would no doubt wish to receive optimum return and to ensure that the premises are looked after. Ideally, leases should balance the rights and responsibilities of both parties.
Leases should be in writing and contain all of the negotiated terms. The lease agreement, the general law and legislation will govern the rights of the parties. As with all commercial arrangements and subject to some constraints, the parties are free to negotiate the terms.
A retail lease is essentially a commercial lease regulated by the Retail Leases Act 1994 (the ‘Act’). If the premises fall within the definition of ‘retail’ then additional requirements and considerations apply. The Act gives greater consumer protection for lessees.
Before offering or entering into a retail lease, lessors must have available a draft lease and Retail Tenancy Guide.
The lessor must give the lessee a disclosure statement at least 7 days before the lease is entered into. The disclosure statement contains detailed information such as the base rent and whether it is calculated on the lessee’s turnover, estimated outgoings including promotion and marketing cost, services and facilities, restrictions on trading hours and details of planned alterations or renovations to the leased premises or surrounding area.
Failure to follow these provisions enables the lessee to terminate the lease within 6 months after entering into it.
If a retail lease contains no option period then the lessor must, no later than 6 months or earlier than 12 months before the lease expires, notify the lessee in writing as to whether a new lease will be offered. If the lessor fails to give the notice and the lessee requests the notice before the end of the lease, the lessor must grant a further 6 months from the date of the notification.
Security bonds required under a retail lease must be lodged with the New South Wales Retail Bond Scheme and the lessor cannot require the lessee to pay its legal costs for preparing the lease, unlike other commercial leases.
Other matters requiring consideration include insurance, assignment and sub-letting provisions, repairs and maintenance, rent abatement and what happens when a party defaults under the lease. Lease documents should always be reviewed before allowing or taking possession of the premises.
We act for both lessors and lessees and have extensive experience in preparing and advising on commercial leases.
What Does The Lease Document Contain?
The following are some typical terms contained in a lease:
- Area to be leased – this should be clearly described with its legal description and street address and include use of additional facilities such as carparks, storage, amenities and other common areas. A plan should be included showing the leased area and size of the premises.
- Term of the lease – terms should be carefully considered. Lessees should ensure that the lease term and any renewal options (which are desirable) coincide with their business plans.
- Lessors will no doubt want a long-term commitment however may also need to consider future plans to sell the property and whether or not it is optimum for the property to be sold with an existing lease.
Options to renew and the time and process for exercising options must also be clear.
- Rent and outgoings – the rent, method and time for reviewing rent must be agreed and understood. The outgoings payable by the lessee are often disputed so estimates should be provided and the parties’ respective contributions clearly set out.
- Permitted use – the lease should allow for the lessee’s intended use which should be broad enough to cover any growth in the business activities. Despite what is contained in the lease, it is the lessee’s responsibility to ensure that any necessary Council approvals or licences are in place.
- Fitout and refurbishment – lessees often require fixtures and fittings installed suitable for the intended use of the premises. The lease should describe the fitout permitted, who is responsible for costs and installation, whether fixtures may be removed by the lessee at the end of the lease and refurbishment obligations when the lease expires.
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