Do you understand your obligations under your lease agreement

Signing a commercial lease agreement can be a big commitment for any business owner and it is important that both the landlord and tenant understand the relationship they are entering into including the rights and obligations they each have to the other party. A tenant should never sign a lease without understanding all of the key terms and conditions and by understanding these terms the tenant could save themselves from serious financial and legal issues down the track. What then are some common provisions included in commercial lease agreements that you should be aware of?

Rent and Rent Increases

The rent clause should clearly outline the agreed rent amount, as well as the frequency of when those payments should be made (i.e. weekly, monthly, quarterly). Additionally, the clause should outline what the landlord can do in the event the tenant does not pay the rent on time, including if any interest or penalties will apply. The clause should give the tenant a reasonable period (i.e. 14 days) before such penalties can be applied.

This clause should then outline the process for reviewing and adjusting the rent throughout the term of the lease. It should specify how often rent reviews will occur (i.e. annually or at other agreed intervals) and the method that will be used to calculate any increase (e.g. CPI, market rent, or a fixed percentage).

Security Deposit or Bank Guarantee

A security deposit or bank guarantee will usually need to be provided by the tenant to the landlord before entering into a lease agreement to protect the landlord’s interests in case the tenant defaults at any point during the term of the lease. The lease should specify the exact amount that is required to be paid by the tenant and whether or not the landlord requires a bank guarantee to be provided or whether they are happy to accept a cash security bond.

This clause should also detail examples of when the landlord may use any part of the security deposit (e.g. for unpaid rent or to remedy any damage to the premises) and also detail the conditions for returning the security bond or bank guarantee to the tenant at the end of the lease.

Term of the Lease and Option to Renew

The lease agreement should specify the duration of the lease term which typically range from 3 to 5 years for commercial leases. The agreement should also state whether the tenant has the option to renew the lease for an additional term upon the expiration of the initial lease period.

If a renewal option is included, the agreement must outline the process the tenant must follow to exercise this option. Additionally, any conditions that the tenant must meet in order to qualify for the renewal, such as providing notice by a certain date or fulfilling specific obligations, should also be clearly defined.

Improvements, Alterations, and Fit-Outs

A tenant will usually want to make alterations or improvements to the premises or may want to undertake a complete fit-out in order to allow them to utilise the premises for their business. The agreement should include what alterations or improvements the tenant can make without having to obtain approval from the landlord and what alterations or improvements will require landlord approval before being made.

The clause should then clearly specify whether the tenant is obligated to restore the premises to its original conditions when the lease ends and who will own the improvements and fit-out upon expiration of the term.

Outgoings

Further to the rent payments and security deposit amount, the tenant will usually also be responsible for paying the landlord any outgoings as they relate to the premises. Outgoings refer to additional costs such as rates, water, insurance contributions, maintenance, and other utilities. If the premises is a part of a complex or building with other tenants then these additional costs will generally be split amongst the tenants, calculated as a percentage based on the area the tenant’s premises bears to the total area of the building or complex.

Assignment and Subletting

Generally, under a commercial lease, a tenant will be prohibited from assigning or subletting their interests in the lease to a third party. If a tenant did wish to assign or sublet their interests the agreement will specify the terms under which the tenant may transfer the lease or sublet part of the premises to another party (generally both will require the landlord’s prior consent). If the tenant chooses to part with their interest in the premises without first obtaining the landlord’s consent then they run the risk of being in breach of the terms of the lease agreement.

Termination

The lease agreement should clearly outline under what circumstances the tenant or the landlord will be in breach of the agreement and how the other party may terminate. Any termination provisions should include a notice period in which the defaulting party will be given the opportunity to remedy the breach before the non-defaulting party is able to terminate the agreement. If the agreement is terminated due to a breach by either party, the lease agreement should clearly define any other rights the non-defaulting party may have such as whether they can enforce any penalties or, make a claim for any loss they have suffered.

Next Steps

Before signing a lease agreement, you need to be confident that you understand and can meet all the terms and conditions, particularly all financial obligations within the agreement. Before putting pen to paper reach out to our legal advisors at Vesta Law so they may review and advise you on your lease obligations and negotiate the terms to protect your business.