7 important points for tenants to consider before signing a commercial lease
A commercial lease is a significant financial commitment for tenants. It can have serious consequences for your business, so it is important that you conduct your due diligence on the lease before signing it.
Here is a list of 7 important points for tenants to consider before signing a commercial lease:
1. Does the Retail and Commercial Leases Act 1995 apply to the lease?
This Retail and Commercial Leases Act 1995 provides significant protection to tenants in commercial and retail leases, including:
- a minimum five year lease term;
- prohibiting a landlord from recovering land tax and other amounts including premiums;
- restrictions on a landlord’s right to withhold consent to an assignment of a lease (such as where a tenant sells its business); and
- key lease terms and financial obligations which must be disclosed to a tenant before entering into a lease.
The Act will apply to your lease if the premises are business premises which are used for the sale of goods to the public by retail, or the provision of services to the public, or are business premises to which the public is invited to negotiate for the supply of service. This will apply to most commercial leases in South Australia. But there are exceptions to this, including:
- if the annual rent exceeds $400,000.00;
- the lease is for a term of one month or less;
- the landlord is a company which the tenant has a controlling interest in; or
- the landlord and the tenant are both companies and the same person or persons have a controlling interest in both companies.
If the Act does not apply to your lease, then you should consider negotiating the various protections that are afforded to tenants under the Act, such as the exclusion of land tax as a recoverable amount and a minimum five year term.
2. Should I register the lease?
We advise tenants register their leases to provide security of tenure.
Once the lease is registered, it will appear on the Certificate of Title for the property.
If you do not register the lease, then if the landlord decides to sell the property the incoming purchaser (who will become the new landlord) may not be bound by the lease. This may affect your right of occupation in the premises and significantly disrupt and damage your business. By registering the lease, the new landlord will have to honour the terms of the lease until it comes to an end on the expiry date.
Registration of the lease will not be necessary if the term of the lease is for less than one year.
3. Is mortgage consent to the lease necessary?
We advise tenants obtain mortgagee consent to their lease.
If mortgagee consent is obtained, then if the mortgagee decides to enforce its rights under the mortgage and take possession of the property and then sell it, the property will have to be sold subject to the lease. This will provide security of tenure to the tenant.
But if mortgagee consent is not obtained, then the lease may not be binding on the mortgagee. If the mortgagee then decides to enforce its rights and take possession of the premises, then it could sell the property with vacant possession.
It is important to keep in mind that if you require registration of the lease, then it is a requirement for registration that the parties must obtain mortgagee consent to the lease.
4. Do I need consent from the local council?
You should check with your local council before you sign your lease to check whether you need to obtain consent for the type of business that you intend to carry on from the premises. You may be able to negotiate with the landlord a condition that the lease is subject to you obtaining all relevant consents from the local council to conduct the type of business from the premises.
If you intend to do a fit-out or other building work in the premises prior to trading from the premises, you should check the council’s requirements for consent including whether development approval is required. If there is considerable time and cost involved in the fit-out or other building work prior to trading from the premises, then you may be able to negotiate with the landlord:
- a rent-free period at the commencement of the lease; or
- a licence for early access to the premises to obtain the relevant consents and to carry out the works before the commencement of the lease term.
If any repair or maintenance works are required to the premises, then you may be able to negotiate with the landlord a requirement for the landlord to carry out such works to the premises before you commence your occupation of the premises.
5. Has the Retail and Commercial Leases Act 1995 been complied with?
You should check that the landlord has complied with its obligations under the Retail and Commercial Leases Act 1995. For instance:
- have you been provided with a copy of the proposed lease at the commencement of the negotiations for the lease?
- have you been provided with a disclosure statement for the lease?
- is the lease for a minimum of five years (including any rights of renewal)?
- if the term is less than five years, have you waived your right to a five year term (through a “Certified Exclusionary clause” in the lease) or is the lease for a short term (that is, less than six months)?
- is land tax excluded from the outgoings under the lease?
- does the lease specify: (1) the outgoings that are to be regarded as recoverable by the landlord; (2) how the amount of the outgoings will be determined and how they will be apportioned to you; and (3) how the outgoings (or part of them) may be recovered by the landlord from you?
- has the landlord provided you with an itemised list of the estimated outgoings to which you must contribute under the lease, in the disclosure statement?
- does the lease require you to only pay one half of the preparatory costs for the lease (that is, costs of lease preparation and mortgagee consent)?
- does the lease require a security bond and if so, does the amount required under the security not exceed four weeks’ rent?
- does the lease contain only one method of reviewing the rent on each rent review date?
Note: A lease cannot contain a clause which allows the landlord to (a) decide which rent review method is to apply on a particular review date; (b) decide whether or not the rent is to be changed on a particular review date; or (c) decide which of the two or more review methods results in the higher or highest rent on a particular review date.
6. Are the lease terms fair and reasonable?
It is crucial to any negotiation for a new lease to be aware of your rights and obligations. You should carefully consider the lease terms to ensure that they are not unreasonable or do not impose any onerous obligations or contain any “hidden surprises”. For instance:
Outgoings and other payments
Does the obligation to pay, reimburse or contribute to outgoings exclude:
(1) land tax, capital gains tax or income tax?;
(2) costs and expenses of a structural or capital nature?; and
(3) costs incurred by the landlord in undertaking any works to the premises or the building?
Is the obligation to pay or reimburse the landlord for any costs and expenses incurred by the landlord limited to such costs and expenses reasonably incurred by the landlord?
Maintenance and repair
Are the tenant’s repair and maintenance obligations reasonable?
Do the tenant’s repair and maintenance obligations exclude:
(1) damage of a structural or capital nature?
(2) damage or deterioration due to fair wear and tear?
(3) damage that is covered by the landlord’s insurance?
Are the painting obligations reasonable? For example, is the tenant required to paint the premises periodically or at any time the landlord deems necessary at its discretion, as opposed to only painting at the end of the lease term?
Is there an obligation on the landlord to insure and keep current insurance for the building for its full replacement and reinstatement value?
Is there an obligation on the landlord to make a claim on the insurance policy in the event of any damage to the building occurring and to expend such monies as required under that policy to reinstate the premises which may be damaged?
Trading and conduct of business
Does the lease impose any obligations that may unfairly restrict the conduct of the tenant’s business, such as:
(1) a requirement to furnish information (for example, gross sales or turnover)?
(2) the manner in which the tenant conducts its business from the premises?
Approvals and consents
Is there a requirement that the landlord must promptly consider any approvals or consents requested by the tenant?
Is there a requirement that the landlord must not unreasonably refuse or delay any consent or approval requested by the tenant and that the landlord may not impose any term or requirement which is unreasonable as a condition of giving its approval or consent?
Entry onto premises
Is the landlord’s right to enter onto the premises reasonable?
Is the right of entry subject to providing reasonable prior written notice and the entry taking place during usual trading hours, and in the presence of an authorised representative of the tenant?
Breach of the lease
Is the landlord required to give at least fourteen days’ prior written notice of any breach or default of the lease, which the tenant has not remedied in that period, before the landlord exercises any termination, right of re-entry or other right or remedy in respect of such breach or default?
Indemnities and release
Are the provisions on indemnities and release reasonable?
Do they exclude any loss, damage or injury that is caused by the landlord’s negligence or its acts, default or omissions?
Does the lease release the tenant (and any guarantor, where applicable) from liability and obligations under the lease, if the tenant assigns or transfers the lease with the landlord’s consent?
Rights of renewal
Is the obligation on the renewal of the lease reasonable, including the period of time for the tenant to give a notice of renewal?
Is the right to renew unconditional and not contingent upon the tenant not being in breach of the lease at the time of renewal?
Reinstatement and make good at lease expiry
Is the obligation to reinstate or make good subject to fair wear and tear?
Is the tenant required to reinstate or make good the premises to a condition no better than the condition which existed at the commencement of the lease?
7. Should I obtain professional advice?
Commercial leases can be very complex and it is always advisable that tenants seek legal advice from a commercial property lawyer before signing a lease, including advice on the terms of the lease, to ensure that tenants fully understand their rights and obligations under the lease, and any changes to the lease terms (such as any unfair or unreasonable terms) or any further terms to the lease that may be required.
It is also advisable that tenants obtain financial and taxation advice from an accountant. If the tenant is a company, then you should obtain advice from your accountant on the most effective structure for your company vehicle.
Our commercial property lawyers have extensive experience in reviewing, negotiating and drafting commercial and retail leases. We can assist both tenants and landlords. If you have any queries or need assistance reviewing, negotiating or drafting your lease, please contact Andrew Mitchard.
The content of this article is intended to provide a general guide to the subject matter. It is not legal advice. Specialist advice should be sought about your specific circumstances.
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