Commercial Lease Agreement

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Commercial lease agreement: how we help

Navigating the nuanced world of commercial leases demands precision and foresight. Progressive Legal doesn’t just draft agreements; we sculpt them with industry-specific expertise. Our team:

• Recognises the intricate commercial challenges faced by Australian businesses
• Drafts tailored solutions that go beyond compliance
• Provides a solid foundation for your success

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What is a commercial lease agreement?

Embarking on a commercial lease agreement is a significant legal and financial occasion for any business, and understanding the key terms is paramount. A commercial lease agreement is a legally binding contract between a landlord (lessor) and a tenant (lessee), granting the lessee exclusive occupancy rights over a premises.

Once signed, this document restricts the tenant’s ability to renegotiate or terminate the lease easily, emphasising the need for careful consideration and expert advice.

What are the key terms to include in commercial lease agreement?

1. Term and the option to renew

In a commercial lease agreement, the “term” refers to the initial period, often with an “option to renew” for an additional term. This option provides flexibility for the tenant to decide whether to continue occupancy after the initial term.

All options to renew the lease must be validly exercised for the renewal to take place. If the landlord or tenant does not comply with their respective obligations this has the potential for implications against the Landlord for not providing the option for renewal or the tenant for not exercising the option within the allocated period.

It is common practice in leases, that a rent increase will correspond with the renewal of a further term. Balancing the advantages of a longer lease term against potential risks is vital. While a longer term may offer stability, it can become a financial burden if circumstances change, and the tenant needs to exit the lease prematurely. When entering into a new lease or exercising the option for a renewal of lease a tenant will need to consider what rental increases might apply.

Understanding the implications and seeking professional advice ensures strategic decision-making aligned with business goals.

2. Permitted use

The “permitted use” clause is often overlooked but plays a pivotal role in a commercial lease agreement.

It outlines the specific activities the tenant is allowed to conduct on the premises. Whether it’s dictated by council zoning, neighbouring tenants’ rights, or the landlord’s promises, the permitted use must be clearly defined. Failure to do so can lead to disputes and potential breaches, empowering the landlord to terminate the lease.

Detailed consideration of the tenant’s commercial objectives is vital when defining permitted use. Consideration also needs to be given to whether any further licencing is required for permitted use. For example, is a liquor licence needed or a council permit to operate a cafe.  Legal expertise helps navigate potential obstacles and ensures that the permitted use aligns with the tenant’s goals.

3. Rent and outgoings

The financial aspects of a commercial lease, including rent and outgoings, form the backbone of the agreement. Breaching these terms can lead to severe consequences, including termination.

It’s crucial for tenants to understand how rent is determined, whether through Consumer Price Index (CPI), market review, fixed percentage increase, or a combination. Negotiating these terms early with professional guidance enhances clarity and avoids potential disputes.

Lease terms often include provisions for annual rent increases. These can be negotiated based on factors such as CPI, market conditions, or fixed percentages. Seeking legal advice during negotiations ensures fair and reasonable terms that align with the tenant’s financial capabilities.

In some cases, not all, Landlords are obligated to provide Tenant’s with a disclosure statement that sets outlines the outgoings for the premises. Common outgoings in commercial leases can include local council rates and charges, land tax, insurance premiums, strata or community levies, sewerage and drainage fees, and management fees if a property manager is involved. A disclosure statement should be carefully reviewed together with the lease before signing to fully understand the financial commitments involved. A disclosure statement should be carefully reviewed together with the Lease before signing.

4. Make good and renovation

“Make good” and renovation provisions in a commercial lease agreement outline the tenant’s responsibilities regarding the premises’ condition at the end of the lease.

Careful review is essential, as initial drafts may contain unreasonable conditions heavily favouring the landlord. Legal expertise helps identify and renegotiate such terms, ensuring fairness and practicality.

Understanding and negotiating “make good” provisions is crucial for tenants. Unreasonable conditions, such as excessive repainting and recarpeting requirements, can be amended during negotiations. A good lawyer can ensure a balanced outcome that protects both parties’ interests.

Can a commercial lease agreement be terminated early?

Early termination of a commercial lease can be complex and requires careful review of lease terms. Here are some common scenarios:

1. Both parties can agree to end the lease early, often involving negotiating a surrender of lease.

2. Significant breaches, like non-payment of rent or failure to maintain the premises, can justify early termination, subject to compliance with the notice provisions for defaults under the lease.

3. In rare cases, unforeseen events making the premises unusable can terminate the lease, usually requiring legal intervention.

4. Assigning or subletting the lease can provide an exit strategy if a tenant can no longer meet it’s obligations under the lease. This option does not terminate the lease but allows you to assign your obligations under the lease to the incoming tenant.

Legal advice is crucial to understand the implications and negotiate terms that protect your interests. Whether you are a tenant looking to end a lease early, a landlord whose tenant is in breach of the lease, or a new tenant looking to take over an existing lease – seeking legal advice from a commercial lawyer will ensure that your interests are at the forefront of any lease negotiations.

Can a landlord refuse to renew a commercial lease

Whether a landlord can refuse lease renewal depends on several factors:

Lease terms and renewal options

Leases with renewal options outline conditions for extension. If the tenant meets these conditions, the landlord generally can’t refuse renewal.

Retail Leases Act 1994

In NSW, landlords of retail leases must notify tenants of renewal intentions six months before the lease ends. As a tenant, it is important that you exercise the option for renewal during the renewal period to ensure you do not waive your right to a renewal.

Breach of lease terms

Landlords can refuse renewal if significant lease terms, like rent payment or property maintenance, are breached.

Legal protections

Tenants, especially in retail leases, have legal protections against unreasonable renewal refusals. Legal advice is essential to understand these protections and negotiate terms.

Reviewing the lease and seeking legal advice well before the lease term ends is vital to understand your rights and obligations. You should also seek advice on any renewal of lease to ensure that you are not agreeing to any terms that are unfavourable.

Key takeaways

Seeking professional legal advice is not just prudent with commercial leases; it’s a strategic necessity. While we have touched on crucial aspects, many other provisions require careful consideration.

Provisions related to assignment, subletting, termination, lessor obligations, security, costs, and insurance, among others, demand detailed scrutiny.

Being the tenant burdened by a challenging commercial lease agreement is an avoidable predicament. Don’t hesitate to seek the expert advice from our experienced commercial lawyers before signing the dotted line. A good lawyer goes beyond explaining; they uncover hidden clauses, negotiate in your favour, and ensure that your commercial lease agreement is a blueprint for success, not a stumbling block.

Your business deserves the protection and foresight that only legal expertise can provide. Contact us on 1800 820 083 or request our advice below.

“I highly recommend Progressive Legal to anyone who wants a solid foundation for business success.”

Josie Ison, Founder at Event Entertainers