10 reasons why you should have a commercial lease

 In Commercial & Property, News
Johnston Withers Lawyers Why you should have a commercial lease

We encourage all of our clients leasing commercial premises to have a formal written commercial lease in place; below we have set out 10 reasons why.

1. Certainty

A formal lease is a legally binding agreement that sets out in writing the terms and conditions of the
parties. This way, there cannot be any uncertainty as to the parties’ rights and obligations under the
lease.

2. Protection

A written lease allows a landlord or a tenant to include specific terms in the lease agreement.

A common term that appears in formal leases is a tenant’s obligation to reinstate and make good the
premises before surrendering the premises to the landlord at the end of the lease term. This generally
includes the removal of tenant’s property (fixtures, fittings etc) and making good any damage due to
the removal and leaving the premises in a clean and tidy condition. If a landlord does not have a
formal lease agreement in place, then its rights against the tenant when surrendering the premises
are very limited.

3. Duration

A written lease agreement containing a fixed term (duration) gives the tenant certainty of the lease
term.

A written lease will set out the fixed term of the lease, for example 5 years with a right of renewal for a further 5 years. If the lease is not writing, there may be uncertainty as to whether the tenant is a
periodic tenant on a month to month basis (where at law a landlord can terminate the tenancy with
one month’s notice) or is a tenant on fixed term implied at law. This uncertainty may lead to a dispute
between the parties as to the duration of the lease.

If a formal lease is in place, there can be no uncertainty as the fixed term will be agreed upfront.

4. Law

The law requires that a lease for a term exceeding one (1) year must be executed in an appropriate
form.

This includes a requirement that the lease must be in writing.  In addition the Retail and Commercial Leases Act 1995 requires the landlord of a “retail shop lease” to provide to the tenant:

  • a copy of proposed lease;
  • a disclosure statement in writing which requires the landlord to disclose (amongst other
    things), the address of the shop, the lettable area, the permitted use, the rent, and the
    outgoings.

A “retail shop” is broadly defined in the Act as any business premises at which goods are sold to the
public by retail or at which are provided to the public, or to which the public is invited to negotiate for
the supply of services.

5. Security of Tenure

Without a formal lease in place neither party is in a secured position.  The lease will generally be terminable on a month’s notice without a normal lease in place. In most circumstances both the landlord and tenant would benefit from having a fixed term lease in place. This provides the landlord with certainty as to income and the tenant with security of tenure.

6. Termination and re-entry

A written lease may allow a landlord to set out the circumstances in which a landlord may terminate
the lease and re-enter the premises.

For example, where there is a default in the payment of rent, the lease will usually set out that the
tenant will have 14 days to remedy the default and where there is a failure to remedy the default, the
landlord can terminate the lease. The absence of an express clause allowing the landlord to terminate
means that the landlord will have to rely on its limited rights at law against the tenant in order to
terminate and re-enter the premises.

At law, it is implied in a lease that a landlord can only re-enter and take possession of the premises if
there is a failure by a tenant to pay rent or the tenant is in default of any other covenant and that failure
or default is not remedied within three months. A landlord could then be restricted from exercising a
right of re-entry until the rent has been in arrears for three months or otherwise the tenant’s default of
a covenant has not been remedied within three months.

This is in contrast to a written lease where the landlord will only need 14 days before it can terminate
and re-enter.

7. Lease enforcement and damages

A written lease may contain provisions that allow for a landlord to recover damages or compensation
for a breach of the lease. This includes:

  • the outstanding rent and any future loss of rent;
  • the costs incurred by a landlord due to the breach, including legal fees; and
  • default interest on outstanding rent.

A landlord may not have the benefit of these rights against the tenant if it does have a properly
prepared written lease.

8. Use of the premises

A written lease will set out the permitted use of the premises in writing.

This will allow the landlord to restrict what use the tenant may use the premises for and contain other
restrictions such as not creating any nuisance to an adjoining tenant or landlord. Without a written
lease in place, there may be uncertainty as to the permitted use which means that the tenant could be
entitled to engage in a use that the landlord does not agree with and may lead to a legal dispute
between the parties.

9. Maintenance and repairs

It is important that the lease sets out each parties’ obligation in relation to repairs of a capital nature
(such as replacement of defective air-conditioning unit or a leaking roof), general repairs and
maintenance (such as regular serving of plant and equipment). Generally speaking it is the
responsibility of the landlord for repairs of a capital nature and the tenant is responsible for the
general repairs and maintenance.

10. Outgoings

The Retail and Commercial Leases Act 1995 prohibits a landlord from recovering outgoings unless
there is a written lease that contains provisions specifying:

  • the outgoings that are to be regarded as recoverable;
  • how the amount of the outgoings will be determined and how they will be apportioned to the
    tenant; and
  • how the outgoings, or a part of them, may be recovered by the landlord from the tenant.

Johnston Withers Lawyers: Experience You Can Trust

Johnston Withers’ Commercial and Property Lawyers have experience in drafting commercial lease
agreements and providing advice to Landlords and Tenants. If you’d like advice or direction from a lawyer, please contact Andrew Mitchard on (08) 8231 1110, or get in touch online.

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