Teddington Blog

The Ultimate Guide to Commercial Leases

It can feel somewhat daunting to be investing in a commercial lease in Australia which is why we’re going to cover information that will ease the process and reduce the stress. We are going to cover how make sure you are entering a smooth and secure negotiation that ensures your investment stands the best chance of paying off.

What sort of leases are commercial?

Strictly speaking commercial leases are those that are leasing a commercial property, which doesn’t really help us with a definition.

Commercial properties though are those that are used to produced economic benefit for either a person or a company.

So commercial leases would apply over spaces such as offices, workshops, warehouses, retail stores, storage sheds, working yards, mechanical shops, industrial units etc.

Essentially a commercial lease will apply over anything that isn’t a residential lease.

 

Does retail commercial leasing apply to your lease?

Retail leases offer greater protection over non-retail commercial leases, making them a stronger lease for the tenant to hold. Your lawyer should be able to identify if you qualify for a retail lease, offering you increased security in your investment.

If you are granted a retail lease, your land lord can’t charge you what’s called Key Money, that being upfront payment that isn’t a guarantee or a deposit, keeping more money in your pocket.

The landlord can’t withhold consent to an assignment of the lease without providing reasonable grounds. This means that they can’t deny your lease agreement without a solid and justifiable reason.

You are also protected from the landlord charging you for lease preparation costs, unless you’re investing in South Australia, thus you should be able to withhold a larger amount of capital.

In NSW, any security deposit that you pay must be registered with the Director-General of the Department of State and Regional Development. While normally you are still ‘guaranteed’ this money back, this provides an additional level of security.

As you can probably tell from those benefits, it is well worth your time to ensure that your lawyer is checking whether you qualify for a legal lease, which is why at Teddington we talk this through with our clients.

 

Commercial Leasing in Australia is Controlled by the States

It is worth noting that in Australia, the laws for commercial leases differ from state to state. This can make it tricky to be certain which laws affect your lease and how they interact with your investment.

This can be especially difficult if you are looking to open a chain of locations across multiple jurisdictions, with each state you open in having a different act to operate under.

Generally commercial lease lawyers in Australia are familiar with the differences and can help you navigate the separate states. A good example of that at Teddington is our work with Hearing Retail Group who has locations in 5 states and one territory. Working under 6 different acts is a complicated affair that affects each location. Now with over 50 locations, Hearing Retail group and Teddington have successfully managed these varied rules.

 

Do I have to register my commercial lease in Australia?

Quite often no, but that doesn’t mean you shouldn’t. Most states have some protectable term where the contract is covered. For Victoria this is indefinite resulting in a lot of people not registering leases. NSW and QLD are for 3 years and SA it is just one year.

It is worth considering registering regardless though, as it gives your lease extra protection. When you register, it will place a notation on the certificate of title that the landlord possesses.

This means that when they present this title to other parties it is viewable, and your stake is at the table.

The most common occurrence here is if they decide to sell the property, the purchaser will see your lease and will have an obligation to uphold your agreement.

So, if you do register your commercial lease, it offers an extra layer of protection over your business should your landlord decide to sell.

For the Landlord, it offers an increase in property value as it represents an already vetted and signed tenant all but guaranteeing a return on the property.

If the tenant requires that the landlord registers the lease, then the landlord must do so and be present at the registration. However, the tenant must pay the cost of the registration.

 

Do I have to have a lawyer look over the commercial lease?

 Again, technically no. However, in this case I would strongly suggest you consult a legal professional as I would with most contracts.

Considering the level of investment that usually goes into a commercial lease, the potential for damage to your business is quite high.

Thus it’s not worth the risk to be signing a contract without someone who is trained to identify potential potholes to your business future.

In commercial leases, tenants can often negotiate the removal of onerous terms that you or a lawyer identify.

Lawyer’s are also great at providing information and ideas for these negotiations, stressing their implications for the success of your business.

Landlords should also consult with their lawyers due to the level of risk they are putting their asset under without professional hands.

 

Unfair Contracts and terms under a lease

 I personally suggest that clients ensure they aren’t infringing on unfair contract terms as these can have significant effects on tenants if not picked up.

Landlords are also at risk if there is an unfair term in the contract as it against legislation and could leave a loophole for tenants damaging your business.

Terms to look at are those that could cause significant imbalance between both party’s rights. That being either the tenant or the landlord benefiting to the others misfortune.

 

What are some terms that I should understand?

These are some key words that should enable you to be able to navigate through the contract. However, I would still suggest consulting a legal professional if you find something you don’t understand.

 

TermHow long you are agreeing to lease for, can also include information about renewing etc.

There isn’t a limit into how much time the lease can run for, however a fixed term must be defined in the lease.

Rent ReviewThis is when the rent will be revised and usually increased. It is often an annual occurrence but can also be negotiated to be a longer term arrangement.

There is a selection of methods for the review to choose from however under most laws you may only use one.

These can be Consumer Price Index, Fixed percentage increase, fixed amount and market rent.

Sometimes percentage rent is used, however we advise against this as it is often used against the tenant in future negotiations.

OutgoingsThis is sometimes in a commercial lease and involves the tenant paying a separate ongoing cost to rent that is meant for the maintenance of the building.
Tenant ObligationsEssentially what is required by the tenants in managing the property. It is almost always unique to the premises and should be looked at with care. Some obligations include:

–      Ensuring the location is clean, healthy and generally well maintained

–      Repairing any damage caused by the tenant that doesn’t affect the structure of the building

–      Operating with appropriate licenses

–      Returning the location to its original state at the end of the lease

DemolitionOutlines the landlords rights should they want to demolish or remodel the location. Often stating they have the right to end the lease prematurely should this be the case.
Assignment or SublettingOutlines the ability and conditions on the tenant in the event of subletting to another party. It usually states that they will need consent on each case however it can be negotiated either way.

If this clause isn’t present, then the tenant usually has the right to sublet without the landlords consent.

DefaultIf the landlord considers the tenant to have breached their agreement, this term enables them to end the lease prematurely. While it doesn’t usually include examples, some may be:

–      Deliberate damage to the location

–      Use for a purpose other then that set out in the lease

–      Not paying rent

Scope of WorksThis clause will usually define the degree of freedom the tenant has in working on the property, whether that be cosmetic or otherwise.

 

How much will it cost me to get a commercial lease in Australia?

The actual lease won’t cost you anything, unfortunately that is usually the end of the freebies. Leasing a property is a significant financial investment both in terms of running the location and securing it.

Generally, the tenant will have to fund a bank guarantee or a security deposit to provide safety for the landlord.

To prove your ability to pay rent, you usually will have to pay in advance when you sign your commercial lease agreement.

The contract will also outline additional costs such as mortgage consent fees, outgoings, operating expenses, turnover rent, promotional funds or remit fees.

An Australian lawyer should also be budgeted considering these financial costs often represent a lot of hard work for you and your business. A lawyer will reduce the level of risk you are exposed to giving you the peace of mind to operate your business.

Fortunately you no longer have to pay stamp duty on a commercial lease, but if you are planning on subletting or transferring the lease then you will have to pay.

 

So what sort of timeline should you expect?

The landlord party (usually their lawyer) drafts the lease agreement and a disclosure statement (for retail) and presents it to the tenant.

This is then the opportunity for the tenant to look over the contract and identify and terms that they are worried about. I would also strongly advise seeking a professional set of eyes to look over it as well.

With your legal team you can then usually negotiate with the landlord to potentially exclude any terms that don’t support your objective with the lease.

The tenant will then collect all the documents they require (usually a fully executed lease, initial rent deposit, certificate of currency for insurance and some sort of bank guarantee or security deposit) and present it to the landlord.

If the landlord is holding a mortgage over the property, they will also need to obtain consent from the mortgagee (usually the bank). The tenant is sometimes held responsible in covering the cost for this consent.

The landlord then usually registers the lease.

 

What if something goes wrong?

 Fortunately, the Australian system is quite defined in your options of what you can do if there is a dispute over the contract.

Failing negotiation, there are dispute resolution procedures that can be initiated that allow enforcement over the outcome.

These differ from state to state so for NSW this would be the NSW Civil and Administrative Tribunal.

 

Conclusion

Commercial leases are costly endeavors and thus is usually a significant investment for both parties. I would strongly recommend getting professional legal advice to look over the contract and to protect your investment. Whether that is through a fixed fee from a legal firm such as Teddington Legal or through more traditional hourly rates.

Check to see if you qualify as a retail lease as there are extra protections that apply.

Make sure you understand which leasing legislation you fall under as every state differs.

Consider registering the lease to enable an extra level of commercial protection.

Ensure you understand your part in the leasing process as to not miss a critical step and put your business at risk.

If you still have questions, feel free to shoot me an email at info@tt.legal or give me a call at +61 2 8096 8143