Business property leases: terms to include in Australia

Introduction

This page provides free advice and information to landlords and to tenants about business leases. It applies to all commercial leases. Special rules apply to specific leases, such as a lease of property for use as retail premises.

It is invariably the landlord who submits the lease to his prospective tenant; therefore the guidance notes provided with each document are largely from the perspective of a landlord. However, this information page is directed to both parties.

Note: the words "lease" and "tenancy agreement" are interchangeable, as are “landlord” and "lessor”, “tenant” and “lessee”

I know all this. Just take me to where I can choose .

Contents

  • Leases an introduction;
  • What the legislation states;
  • Who sets out the terms?;
  • Why terms matter?;
  • Power and the economic cycle;
  • Terms to include;

Leases an introduction

A lease is a contract between the lessor (the owner) and the lessee to use the property of the owner. A lease can relate to land, or to personal property such as motor vehicles, printers and telephone systems. If the lease relates to land, the lessor is called the landlord and the lessee, the tenant.

Depending on which state of Australia you are in, different legislation will determine the rules on leases. Furthermore, different types of leases are governed by different pieces of legislation. For example, in Queensland, the Retail Leases Act 1994 applies to "retail shop leases".

What the legislation states

An Australian lease agreement is usually either for a term of 1x1x1, 3x3x3 or 5x5x5. This gives both the landlord and tenant two options to renew. The shorter the term, the less protection for the tenant, however, there is increased flexibility for the tenant if their business doesn’t go according to plan.

A lease is usually reviewed annually and most frequently, “upwards only”. If the term of a lease is for five years or less (including any additional term under right to renew), the tenant must get a section 16 certificate.

Whichever act is relevant to your lease will also provides for how the rent can change and the outgoings that the landlord can recover. It is common for the landlord not to be able to recover outgoings unless they are specified in the lease.

Key issues that need to be addressed in the lease are:

  • The term of the lease;
  • The rent amount;
  • Frequency of the rent;
  • Rent reviews – when and how;
  • Details of the tenant's responsibility for the property outgoings;
  • Permitted uses of the property;
  • The option to extend (if applicable);
  • The bond or bank guarantee (if applicable).

Who sets out the terms?

The terms of the lease are negotiated between the lessor and the lessee. Although a lessor might provide a document of enormous complexity, accompanied by a terse statement that no amendments will be permitted, the tenant has every right to discuss and negotiate the terms. (subject to the law of that particular state).

Most prospective tenants are not prepared to withdraw from a transaction which has already cost them time and money, and in respect of which they have probably made commercial decisions from which it would be difficult to withdraw. The landlord is perfectly aware of that. However, the landlord is also aware that if there are features of the lease, which may cause serious problems for the tenant, then the tenant's solicitor will have a professional obligation to recommend to his client that the deal should not go ahead. The result of this power struggle is that the tenant's solicitor is likely to make such amendments as he feels are absolutely minimally necessary, taking his client's instruction not only on the main commercial items in the lease, but on any more obscure legal points where no change has been proposed.

Why the terms matter

Most business agreements serve two main purposes - first to record the terms agreed and secondly to provide protection to each party against a breach of the terms by the other. Many commercial agreements can be put to the back of the bottom drawer after signing and may never again see the light of day. A business property lease does not come into that category. It is therefore very important that each side is certain that every detail is reasonable and fair.

Power depends on the economic cycle

Depending on the where the economy stands within its cycle, the landlord or the tenant may have the upper hand. When times are booming, people have money and enthusiasm to start their new business, a landlord will be far less likely to accept large amendments to his draft lease than when times are bad and he is desperate to obtain the letting. Tenants also often fail to appreciate that a landlord may want to either borrow against the "investment" created by the tenant's occupation, or alternatively to sell it. The landlord is therefore concerned to maximise the commercial value of the lease. There are many provisions in a lease which may not put the tenant at serious risk, but which do improve the commercial value of the property. Thus, when a landlord's solicitor insists on terms, which help him create an "institutional quality" lease, the tenant should realise that he has some bargaining power.

Specific terms you might like to see (or include if you are a landlord) in your lease

Extent of the property

Agree the plan. Landlords will avoid future problems and arguments if they go to the small expense of obtaining a proper conveyancing plan clearly identifying the areas precisely. Your plan should also show matters referred to in the body of the lease, such as areas designated for parking, access, refuse storage, and the location of underground or overhead cables, pipes, drains.

Lease term

The term of the lease is of prime importance to both parties. Subject to rent reviews, the longer the term the greater the value to the landlord. If a landlord wishes to borrow money against the security of the lease, the bank will be unlikely to consider a proposal with a lease of less than five years. A tenant might need a long lease in order to justify high fixed costs or machinery installation, or he may prefer a short lease so that his obligation to pay rent does not hang over him for longer than minimally necessary. Choose accordingly.

Early termination - break clause

A tenant may be able to negotiate a "break clause" - that is a provision for the tenant to give notice, at some particular point in time, to terminate the lease then or shortly afterwards. In that way the tenant has the benefit of as long a lease as he chooses, but without the risk that he will want to move on and be stuck with the rent payment. Whether or not a landlord is prepared to accept a break clause depends on the importance of the transaction generally. A landlord presented with a break clause proposal should point out the reduction in the capital value of his property which follows and ask for a higher rent to compensate.

Rent

Rent is generally calculated in $s per square metre. The landlord will often specify a particular round sum when a property is advertised. Like all terms of the lease, the rent is a matter for negotiation. It is very helpful to both parties if the landlord has prepared an accurate scale plan of the interior of the property, from which measurements of the areas can be taken.

Rent review

If the lease is for longer than a few years, the landlord should insist on a review to bring the rent into line with rents as they are at that future review date. The less frequent the reviews, the more the tenant benefits by not having to pay the inflationary rise in rent until the review date. Most rent review provisions allow for "upwards only" review. Occasionally this can prejudice a tenant. However, failure to include this provision would reduce the value of the property to the landlord, because a prospective purchaser or lender would not be able to count on the current rent remaining payable beyond the review date.

Responsibility for repairs and property maintenance

If the cost of the lease justifies it both sides are strongly recommended to rely on professional surveyors to negotiate repairs terms. If surveyors are not involved, then the landlord and tenant should sit down and make a written list of items with the repairs responsibility marked against each. Without doubt, one of the most fruitful sources of property litigation concerns liability for repairs. A tenant coming into a comparatively new property should understand that the landlord may have little scope for negotiating on the question of repairs, particularly if he is the developer.

Is the tenant allowed to assign or sub-let?

Sub letting is generally out. There are sound legal reasons why a landlord should not permit sub letting. If a proposed lease is to someone whose business requires occupation of smaller parts by others, then he could insist that the tenant uses license agreements rather than sub leases to deal with the downstream.

Assignment is where the tenant transfers the balance of his lease term to someone else. A tenant should understand that a landlord has accepted his package terms knowing the person with whom he is contracting. If the tenant is completely free to assign, then the landlord could find he has given consent to an assignment for someone who fails to pay the rent. The tenant however, really has to be able to part with his interest if he should need to do so. Both sides should therefore consider carefully the extent to which they might need to protect their rights on this question. It is likely to be concluded on the basis that the tenant is allowed to assign, but only subject to safeguards for the landlord.

If the person to whom the tenant assigns fails to pay the rent, the landlord can still come back to the tenant and ask him for the full rent. When the assignee himself assigns, then the original tenant is totally free of obligation.

Please note that the information provided on this page:

  • Does not provide a complete or authoritative statement of the law;
  • Does not constitute legal advice by Net Lawman;
  • Does not create a contractual relationship;
  • Does not form part of any other advice, whether paid or free.
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