So you have found a commercial property for lease or you are the owner of a commercial property for lease. Before you sign the lease agreement, make sure you understand all of its terms and conditions, otherwise you could face serious financial and legal problems.
Sometimes Overlooked
An obvious but sometimes overlooked issue is the physical identification of the commercial property for lease. Make sure that you fully understand the boundaries and areas of the leased premises. The address stated in the lease might not necessarily include all the component areas and spaces that you had in mind in your negotiations.
Other terms and conditions to consider or negotiate before signing the lease include:
(1) Handover Date
This is the date when the keys of the premises are haned over to the new tenant and when fitout of the premises can begin. Depending on your negotiations rent may not be payable during this period until the commencement date.
(2) Lease Commencement Date
This is the date when the lease actually commences and rent is payable, unless a rent-free period had been offered.
(3) Fit-out Contribution
An amount agreed by the owner / landlord as contribution towards the fit-out of the leased premises.
(4) Rent
What is the rent amount including and excluding GST. Is rent payable weekly or monthly?
(5) Outgoings
These are the landlord’s expenses related to the ownership and upkeep of the premises. They may include council rates, water charges, building insurance, security and cleaning. Who pays the outgoings? Depending on the negotiations, outgoings or some of them are either paid by the tenant or the landlord. Ensure that you understand clearly what outgoings are included and how the outgoings are to be calculated. As a tenant, you would want a clause on your right of review of these outgoings and type of disclosure and evidence of costs the landlord must supply.
The total amount that a tenant pays for rent plus any outgoings is termed occupancy cost. When comparing different leases of commercial properties, the occupancy cost is the more accurate parameter then just the rent.
(6) Lease Terms
Will it be short or long term? A long term lease is typically five years or longer suitable for well established businesses. With a long term lease the tenant gets stability of location and more bargaining power on the rent, while the landlord gets stability and security. A short term lease is usually for less than five years. For newer businesses, a shorter lease is a lower risk option. If the premises are in a high demand location, a short term lease is preferred by landlords.
(7) Permitted Use
If this clause exists in your lease especially for a long term lease, as a tenant, you should ensure that the permitted use fits your current business and in the future, as well as ensuring that a potential buyer of your business or assignee of the lease is not constrained.
(8) Rent Reviews
Reviewing the rent of a commercial property at specified intervals ensures that the rent keeps pace with current market rates. Rent reviews generally take place on the anniversary of the lease each year. The common methods of rent review are: CPI or fixed percentage increase and review to market.
Given the increasing amount of your commercial property rent year after year due to rent reviews, it is therefore so essential that you begin with a commencement rent that is at market rates, otherwise you may find yourself in a position that your current rent is way above market rates. If you find yourself in such a situation, you may need the expertise of a commercial valuer to assist you in determining the current market rent.
(9) Options to Renew
An option is a provision in a commercial property lease agreement allowing a tenant to renew their tenancy for an additional term. If a lease contains no options the landlord is not obliged to renew the lease. You would also need to know how do you exercise the option and when do you need to take action. Also, is a market rent review due at the beginning of the option term?