What is a commercial lease?

A commercial lease is a legally binding agreement entered into between a landlord and a business tenant for the rental of property. It sets out the rights and obligations of the owner of a commercial property (landlord or lessor) and a third party that has agreed to occupy the property (tenant or lessee). Commercial leases are more complicated than residential leases.  Lease terms can vary significantly from lease to lease and may also vary according to whether the lease is for commercial or retail premises. It is important that both parties understand the terms of the lease and ensure that they can meet all the terms and conditions.

It is essential that the commercial lease reflects your needs and is clear.

What should be considered before signing a commercial lease?

As a tenant, you must consider the following before signing a Commercial Lease:

  • Obligation to pay rent: By signing a commercial lease, you are committing yourself to regular payments over an extended period of time. This can,  ultimately, be expensive. Signing the lease puts an obligation on you for payment of rent on every due date for the entirety of the lease term;
  • Penalty Provision: Late rent payment can result in forfeiture of the property to the landlord. This can happen without notice from the landlord and you may be prevented from accessing the premises. During this period, the landlord can continue charging rent until a new tenant fills the vacancy, which means you may end up paying rent long after you have left the premises if the terms of the lease are still current;
  • Rental Consideration:  The landlord is under no obligation to reduce/adjust the rent amount.  If your business is struggling financially or you are unfit to work and cannot pay rent, it is advisable that you contact the landlord to negotiate the payment of rent.  Alternatively, you could hire a commercial lawyer to do so on your behalf;
  • Consents: Depending on the type of business to be conducted on the premises, various consents from the responsible authorities might be needed. These need to be checked before the signing of the lease. Any fitout works might need development consent from the Council. The Council may stop you from trading if the required consent is not gained;
  • Break Clause: It is necessary to check whether there is a break clause in the lease. A break clause allows you to terminate the lease early or by providing one month’s notice. A notice of intention to break the lease has to be given to the landlord. However, since break clauses in the lease are quite rare, you can (i) buy out the term of the lease, i.e., pay out the remaining time left on the lease; (ii) assign the lease to a third party; (iii) negotiate an early exit with the landlord or (iv) sublet the premises;
  • Outgoings: Before entering into a commercial lease, it is important to understand that there are other costs outside the standard rent payments that you may have to pay. Outgoings are the costs associated with the maintenance of the premises such as council rates and taxes, insurance premiums, maintenance and cleaning costs and promotional funds for marketing purposes. It is important to speak to an expert commercial lawyer to get estimates of these costs so that the budget can be set accordingly;
  • Last date for exercising renewal: Since commercial leases have a longer period of tenancy and generally have options to renew, it is important to keep in mind the last day for exercising the option to renew and what requirements the business must meet;
  • Permitted Use: You should be clear about the business that may to be conducted on the premises and ensure that this is reflected in the lease.  It is also important to check the zoning of the premises along with other restrictions like hours of access and prohibition on renovations during trading hours etc.;
  • Personal Guarantee: If you are entering the lease as a limited liability company the landlord may request a personal guarantee or a director’s guarantee. Providing a personal guarantee may place your personal assets at risk, especially if there are problems with paying rent. Other alternatives should be considered, such as:
    • negotiating with the landlord to increase the security deposit or bank guarantee; or
    • reducing the liability under the personal guarantee by agreeing to a certain amount.

You can refuse to provide a personal guarantee. Given that a Landlord may insist on a personal guarantee before signing a lease, you may want to seek legal or financial advice before proceeding further.

Key Considerations

In signing a commercial lease, you are entering into a binding agreement between you and your landlord. It is essential that the commercial lease reflects your needs and is clear – it will minimise risk and prevent possible future disputes between you and the landlord.  Of course, it is always prudent to obtain legal advice before committing to a long-term contract such as a lease.

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