Commercial Leasing: common mistakes when entering a lease –and how you can avoid them

Commercial lease agreements can be complex documents designed to meet the needs of both the landlord and tenant of a property under changing circumstances. No wonder things can go wrong for either party if they are not careful, especially as a commercial lease involves a significant commitment for both parties. Below, we outline some common mistakes that can represent pitfalls for prospective tenants.

Commercial Lease Agreements in NSW

Commercial leases in NSW are generally not regulated by statute but by common law. For the most part it is up to the landlord and tenant to decide on the terms of the lease. Some commercial leases relating to retail shops are governed by a particular statutory regime contained in the Retail Lease Act 1994. Other rules, affecting the formation of commercial leases are found, for example, in the Conveyancing Act 1919. There are also a number of implied covenants, but these will not apply if there is an inconsistent express covenant in the lease itself. These include the tenant’s need to keep the premises in good condition, to allow their landlord to inspect the premises from time to time, or to re-enter the premises for breach or non-payment of rent.

 If the term is greater than 3 years, then the lease must normally be registered with the NSW Office of Land and Property Information in order for it to ensure the tenant’s rights to exclusive possession of the premises for the term of the lease.

Permissions and Zoning

Before entering a lease, it is important that checks are undertaken with the local council to ensure that the intended use of the leased premises is permitted under the Council’s zoning and development regulations.

Similarly, it needs to be ensured that the building and any improvements are within local, state and federal requirements.

If there is a mortgage on the property, ensure the funder has consented for the premises to be leased. If they have not consented, they may be able to terminate the lease if landlord fails to make payments due.

Heads of Agreement

A tenant should ensure that they take legal advice to review a Heads of Agreement or Lease proposal prior to signing. Amendments may be suggested in an effort to protect the tenant’s interests. Once signed, the landlord’s lawyers will prepare the lease incorporating the agreed terms, and it may well then be too late to negotiate further. It is imperative that the tenant knows what their precise responsibilities are going to be throughout the term of the lease. Details matter. Avoid assuming something is included in the lease that might be important. Parking costs may be payable to a third party, or what specific items of equipment are to be maintained and by whom? Other clauses may demand certain operating hours for the business and a refurbishment clause may allow the landlord to refurbish the premises while the lease is ongoing, disrupting the tenant’s business.

Lease Documentation

It is crucial that the lease documentation is correct from the outset to avoid or at least limit future disputes that may arise during the lease term, including any extension option that may apply to the lease.

There are a number of important considerations to be considered, including the following:

(i)Rent: this refers not just to the amount of the initial rent but also to when and how the rent will be reviewed over the term of the lease agreement. This may be by way of a fixed percentage increase or determined by a market review. Whichever method is applied can make a sizeable difference to the rent payable after each checkpoint date provided for in the lease.

(ii) Term: the lease period may be 5, 10 years or even longer. It is important to ensure, as far as possible, that these obligations can be met in the longer term.

(iii) Outgoings: these are the costs that the tenant will be obliged to pay. This can include, for example, water, electricity and cleaning. Whether it is all or a proportion of the property’s outgoings that the tenant is committing to pay, it is crucial to obtain an estimate and to identify precisely what outgoings they are committing to. Repairs and maintenance clauses are a common source of disputes.

 (iv) Option to renew:  this is the frequency and term of each option to renew. Such a clause should provide more flexibility if the business is going well so they can then renew on terms that have already been negotiated.

(v) Subleasing or assignment: a sub-leasing clause can provide some assurance that if payments become onerous for whatever reason some or all of the tenant’s obligations under the lease can be transferred.

(vi)  Deposits or bank guarantees: this refers to the amount the landlord requires to have covered as security, usually amounting to the equivalent of 3-6 month’s rent.

(vii) Make Good Provisions: this can amount to a costly overhead for the tenant depending on what making good work on the property is agreed with the landlord at the end of the term or at various dates during the term.

(viii) Legal costs: the parties may agree to pay their own legal costs, although sometimes the tenant will be expected to also pay the landlord’s legal fees. There may be room for negotiation so that at least the amount to be paid is capped.

Failure to give proper consideration to these issues can seriously damage a business.

Contact our Commercial Property Lawyers based in Sydney, NSW

Whether you are a landlord or tenant entering into a commercial lease, you will need advice from an expert to ensure that your rights and obligations are clear to you and adequately taken care of. At Szabo & Associates Solicitors, we have many years of experience advising on all aspects of property law for both landlords and tenants, both prospective and current. If you need assistance in drafting or reviewing a lease or are in dispute, please call us on 02 9281 5088 or complete the online contact form.