Entering a commercial tenancy agreement or lease is a very significant business decision. It is a legally binding contract that will affect the value of your business. Once a lease is signed you are committed to paying rent and outgoings and fulfilling all other obligations in the lease for the term specified.
Knowing what to look for in a lease is vital and you should seek legal advice before committing yourself. It is easy for you to be preoccupied and emotionally involved with moving into premises and fail to give the lease proper attention or seek professional advice.
On this page:
Understanding your lease
Know the lease law
What to do when faced with a rent increase
Disputes
Understanding your lease
A commercial property lease is usually for a set time, ending on a specific date. As the tenant, you have the security of a long lease but also the obligation to pay the rent for the entire period of the lease even if you leave the premises. Often the lease will give the tenant the right to renew the lease for a further set period when the initial period ends.
It is your responsibility to make the regular rent payments on time, as specified in the lease. Interest may be payable on any rent payment that is late.
The tenant is usually responsible for repairs to the premises for damage caused during the term of the lease, except for structural repairs. At the end of the lease the tenant must usually leave the premises in the same condition they were in at the commencement of the lease, except for deterioration by ordinary wear and tear.
In addition to rent, the tenant usually pays for council rates, water rates, building insurance, public risk insurance, plate glass insurance, stamp duty and half the cost of preparing the lease documents.
A tenant must always obtain permission to alter the premises, even for very minor alterations. It is best to obtain written permission from the landlord. A tenant who installs fixtures may be entitled to remove them at the end of the lease, if they are classified as trade fixtures. You should have written agreement on this from the landlord before installing any fixtures.
Some shopping centre leases require tenants to pay a contribution for promotions, building improvements, management costs and security costs. The rent may also be a percentage of the tenant's takings, with rigorous requirements for book-keeping.
There are some key questions you should check before signing a lease:
Question | Tips |
What is its duration? If you are taking over an existing lease, how much longer does it have to run?
| A financier may be unwilling to lend for a term that substantially exceeds that available under a lease.
|
Does the lease have an option(s) to renew?
| When exercising an option, do so exactly in the manner provided in the lease and within the timeframe specified.
|
What is the rental and how often does it have to be paid?
| Determine the percentage of turnover that will be taken up by occupancy costs (target 7 to 10%) and build the frequency of rental payments into your cash flow projections. If you desire to match rental payments to peaks in your cash-flow or seek a rent-free period for fit-out, negotiate this up-front.
|
Does the lease include a 'right of assignment' clause?
| If it is decided to sell the business, the lease must be able to be assigned (transferred). Be aware of the conditions under which this can occur.
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Does the lease contain an arbitration clause?
| This provision gives you an avenue to resolve any disagreements between you and the landlord over future rental at the time of an increase or taking up an option.
|
Does the lease allow for the type of business you intend conducting?
| It is your responsibility to ensure your use of the premises is permitted under council zoning. Talk to the council.
|
Can you sub-let all or part of the premises? If so, under what conditions?
| This provision of the lease becomes important if you do not need all of the premises and wish to sub-let any area in excess of your requirements.
|
Who is responsible for council rates, water costs, legal fees, stamp duty, etc under the lease?
| Ensure the landlord’s solicitor’s fees do not include 'negotiations' – they should relate solely to preparation, stamping and execution of the lease.
|
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Know the lease law
The
Retail and Commercial Leases Act 1995 specifies obligations relating to leases over business premises at which goods or services are sold or provided to the public where the rent is below $250,000 a year.
The Act covers issues such as:
- ensuring that the premises are structurally suitable for the intended business purpose
- ensuring that the lease is available in written form
- when the lease comes into effect
- reviews of current market rent
- maintenance costs.
Before leases covered by the Act are entered into or renewed, the lessee must be given a disclosure statement for the lease. This is a written document stating required information such as the permitted uses of the shop, the lettable area, access arrangements, the basis of the rent and a range of other items.
Make sure you agree with all the items in the disclosure statement because these will become the basis of your agreement.
If the lease is situated in a retail shopping centre, the disclosure statement must also state further information including:
- the address of the retail shopping centre
- the number of shops in the retail shopping centre and their total lettable area
- the number of parking bays available for the use of customers of the shop
- the number of parking bays available for use by the lessee and the lessee's employees.
However, some activities may not be covered under the Act, such as wholesale distribution, sporting organisations or charities. The Act also does not cover some other exclusions such as leases of less than one month.
If in doubt, you should obtain legal advice.
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What to do when faced with a rent increase
Rent increases are the most common recurring problem arising from the occupancy of leased premises. The timing and amount of an increase can often catch you by surprise.
Ask yourself these rent increase questions:
- Are you aware of the provisions in your lease dealing with the time and method of adjustment of rent?
- Do you have a budget for rent increases?
- Are you prepared to advance sound and convincing arguments against the amount of any increase considered excessive or likely to place undue financial strain on your business?
- Have you arranged professional advice for times of dispute?
- Are you aware that arbitration is available to resolve any dispute that arises?
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Disputes
Even if you have a well-structured lease agreement, disputes may occur. First, check the disputes resolution clause in your lease and work through the procedure.
For businesses covered under the
Retail and Commercial Leases Act, a party - or former party - to a retail shop lease may apply to the Commissioner for Consumer Affairs for mediation of:
- a dispute arising from, or related to, the lease
- a dispute related to any other matter relevant to the occupation of the premises or to a business conducted at the premises.
To proceed, the other party must agree to the mediation process. A fee is payable on an application under this section.
Businesses not covered by the Act should seek legal advice regarding dispute resolution. Legal action in the magistrates or district court may be the only course of action. You should ascertain the likely cost of this action before you commence.
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More information
On this site
Retail tenancies
Downloads
Leasing commercial property (PDF 243KB) - BizFacts
Contact
If you think your business may be covered under the Retail and Commercial Leases Act 1995:
Consumer and Business Services
1st Floor, 91-97 Grenfell Street
ADELAIDE SA 5000
Phone: (08) 8204 9533