What is a Commercial Lease and When Do You Need It?

Rose Lawyers on 23 February 2015

Commercial Lease is the legal document which sets out the rights and responsibilities of both landlord and tenant of a commercial premises (i.e. a premises that a tenant will use for conducting business, manufacturing or storage rather than for living in).

There are two kinds of Commercial Lease, for two kinds of commercial intent:

  • 1. Retail Commercial Lease: applicable wherever goods or services are being (or will be) sold to the public from the premises, and;
  • 2. Non-Retail Commercial Lease: applicable wherever the premises will not be used to sell goods or services to the public, but will still be used for business purposes (e.g. offices, warehouses).

Contained within a Commercial Lease will be all of the basic terms and conditions set out under standard Leases, including:

  • Who the parties are;
  • The rental amount;
  • When the rent is to be paid;
  • The length of the Lease;
  • Whether there are any further terms;
  • What is expected of the tenant throughout the tenancy;
  • What the landlord will and will not do.

There are many clauses in a Commercial Lease that are similar to a Residential Lease. Unlike a Residential Lease, there are also different considerations that both tenants and landlords should be aware of as they are negotiating terms.

retail store interior

Understanding Your Responsibilities Under a Commercial Lease

For Tenants

For tenants, it is important to make sure the terms of the Lease are consistent with your own understanding of the terms. The two most important considerations for tenants are the rental amount and the term of the lease. Before signing the Lease, make sure these terms are in line with your understanding of them.

Within a Commercial Lease, it will be made clear what you can and cannot do on the premises. In order for the Lease to be workable for you, you must ensure that the Lease allows for the kind of business you are planning to undertake.

Some other considerations for tenants include:

  • Mortgage – if there is a mortgage over the property, you should make sure the mortgagee (usually a bank) consents;
  • Insurance – make sure you understand what the landlord will insure and what additional insurance you will need to take out;
  • Photographs – make sure to take extensive photographs of the property so that when the Lease ends, you know what to do to bring it back to its original state;
  • Zoning – ensure the zoning of the premises allows the type of business you intend to operate;
  • Land Tax – if you are a tenant under a Non-Retail Commercial Lease, you could be liable for land tax assessed on a single holding basis (i.e. as if the property is the only property held by the landlord). If the Lease is a Retail Lease, you will not be responsible for this tax.

Industrial tenants who intend to operate heavy machinery or vehicles on the property need to be particularly aware of the landlord’s criteria, and whether or not it allows this type of business activity. Care must be taken not to damage the premises (e.g. damage to the floor caused by heavy machinery or moving parts).

For Landlords

Areas of responsibility that landlords must take care to understand when entering into a Commercial Lease include:

  • Insurance - make sure you understand what kind of insurance you will be required to take out over the property;
  • Rental Provisions – make sure to know when rental payments are due, what to do if your tenants fail to pay, and ensure that your tenants are paying rates in accordance with the Lease;
  • Bond – ensure that the Lease allows for an adequate bond, as this amount will be your first port of call if you have to repair the premises when the tenant leaves;
  • Use of Premises – make sure that your tenant’s use of the premises as allowed under the Lease is not an illegal one.

“While tenants will be aiming for a low bond, landlords will be competing for a high one; whereas landlords will want provisions for rental increase, tenants will want a rate that’s set in stone.”

warehouse interior

What Should I Make Sure is Included in a Commercial Lease?

Heads are most likely to clash during negotiations, when landlords and tenants are competing to protect their own interests. While tenants will be aiming for a low bond, landlords will be competing for a high one; whereas landlords will want provisions for rental increase, tenants will want a rate that’s set in stone.

This is when independent legal representation could work in your favour – both for landlords and tenants alike.

A lawyer will be familiar with the general conditions and standard terms of a Commercial Lease, enabling them to quickly and efficiently find anything that is out of the ordinary. A lawyer will also be able to assist you in negotiating Lease terms that are most beneficial to your interests.

For Tenants

When negotiating the terms of a Commercial Lease, a tenant should aim to:

  • Ensure that none of the General Conditions of a standard Lease are excluded;
  • Negotiate for a minimal bond;
  • Avoid the inclusion of conditions relating to the Principal Properties and Securities Act, which could enable the landlord to place a charge over your business assets or your house;
  • Ensure the usage of the premises as defined within the Commercial Lease allows for the type of business you intend to conduct, or is broad enough to incorporate what you want to do.

For Landlords

When negotiating the terms of a Commercial Lease, a landlord should aim to:

  • Ensure the Lease allows you to place a charge over the tenant’s property under the Principal Properties and Securities Act;
  • Ensure your liability for rates and insurance is minimal;
  • Ensure the bond amount is sufficient to cover yourself for any damage the tenant might cause to the premises;
  • Make sure the Lease provides for appropriate increases in rental throughout the term and at the commencement of each further term.

Summary

Commercial Lease is similar in its role to a standard Residential Lease, in that it sets out the rights and responsibilities of landlords and tenants in relation to each other.

There are two types of Commercial Lease: Retail and Non-Retail. Retail Commercial Lease are applicable where the tenant intends to use the premises to sell goods and services to the public. Non-Retail Commercial Leases are applicable for all other business purposes.

Landlords and tenants will largely be competing for interests and terms that might be direct opposition to one another. Before negotiating the terms of a Commercial Lease, you should know which rights you should aim to have covered under the terms.

If you employ the services of a lawyer when negotiating the terms of your Commercial Lease, they will be able to assist you in achieving the most ideal Lease terms as well as ensuring your best interests are protected. Although it is not required by law, legal representation can be greatly beneficial – for both landlords and tenants – when negotiating a Commercial Lease.

For professional legal advice regarding Commercial Leases, contact Rose Lawyers on 03 9878 5222.