ESSENTIALS IN A COMMERCIAL LEASE
- Property address
The address of the premises needs to be clearly described. Whilst an obvious point, time can be wasted clarifying a property’s legal description where a Lease is to be registered and/or where a lender is involved.
- Term of the Lease
The commencement date and the length of the term of the lease needs to be stated.
The rent for the first year of the term must be clearly stated, as well as how the rent will be calculated after the first year (i.e. fixed percentage increase or CPI).Where the option to renew is exercised, the rent for the first year of the new term will usually be the then market rental and thereafter the rental will be increased annually in the manner specified.
Any options to renew the lease for an additional term or terms must be specified. It is vital for a Lessee to have option periods to ensure it has security of tenure when attempting to sell the business conducted on the premises. The lease must clearly state how a decision to renew must be made and conveyed to the Lessor within a defined period of time before the end of the lease. Details of any market reviews and dealing with disputes in respect of market reviews should also be clearly expressed.
- Goods & Services Tax (G.S.T.)
It should be clearly noted if Goods and Services Tax is payable by the Lessee in addition to the rent.
- Outgoings – operating expenses
The Lease must specify how Outgoings/operating expenses are recovered by the Landlord. These costs will either be included in the rent or recoverable as an additional amount payable by the Lessee. Generally outgoings for the year are estimated for the Lease and invoiced monthly, with an appropriate adjustment when the actual amount of outgoings is known, generally at the end of the year.
The Lease will state if the Lessee must provide the Lessor with a bank guarantee or cash for the bond and the amount of the guarantee.The Lease may also require the Lessee to provide personal guarantees as an additional form of security.
- Assignment or sub-letting
The Lease may allow the Lessee to assign or sublet with or without the Lessor’s consent. Generally, the Lease should provide that the Lessor’s consent must not be unreasonably withheld, provided that evidence is given to the Landlord that the new Lessee is able to perform the lease and meet their obligations and the Lessee is not in default under the Lease, the Lessor cannot refuse the assignment or subletting.
- Utilities – Services
The Lease will state whether the Lessee is to pay the cost of utilities/services consumed on the premises.
The Lease will usually provide that all signage requires the Lessor’s consent. As adequate signage may be a significant component of the success of the Lessee’s enterprise, the issue should be discussed and agreed before the Lease is signed.
The insurances required by the Lessee will be set out in the terms of the Lease.
- Repairs & Maintenance
Generally, repairs and maintenance are the responsibility of the Lessee however any work that may be required of a structural nature is the Lessor’s responsibility. This issue can be a matter of dispute where there is a disagreement as to the nature of the defect and the Lease does not clearly identify the specific obligations of each party.
- Use of the premises
Whilst the permitted use of the premises by the Lessee will be stated, it is for the Lessee to ensure that the use complies with Council’s requirements. Where there are any doubts whether the use is permissible, the issue should be investigated before any Lease is signed. Where the premises are part of a Centre/Complex with multiple tenancies, a lessee may want an exclusive right to the permitted use within the complex.
The lease may contain a clause entitling the Lessor to relocate the Lessee to other premises within the Center/Complex.
- Refurbishment by Tenant
The Lease may state if the Tenant is required to undertake a refurbishment of the premises after a specified period of time, and/or upon the termination of the lease at the cost of the tenant.
- Default by Tenant
Default by the Lessee has two potential outcomes:
a) If the default relates to significant issues such as payment of rent or the use to which the premises are put, then default entitles the Lessor to take back possession of the premises, re-let them, and recover any loss from the Lessee.
b) If the default is of a minor nature then the Lessor is able to recover damages.
- Car parking
Arrangements between the landlord and the Tenant should be clearly stated in the lease document to ensure that the Lease clearly reflects what has been agreed between the two partied. Availability to car parks for staff and customers can be of significant importance to some businesses.
- Car parking
- Personal Guarantees
Where the Lessee is a company or trust, the Lessor will usually require personal guarantees.
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