The lease agreement and relationship between Lessor and Lessee is an essential part of everyday commercial business in Australia.
We provide leading-edge legal services in relation to all aspects of commercial property leasing including:
Commercial Building and Office Leases.
Retail Shop Leases.
Industrial and warehouse Leases.
The Lessor’s real property is a performing asset that requires the security of protection and continuance as a performing asset.
Our services to Lessors include:
Drafting and negotiating lease terms particular to their requirements and specifications.
Rent and outgoings recovery and identification.
Defaulting Lessee breaches.
Termination of Lease.
Renewal of Lease.
Negotiating Right of Entry documents in transactions involving the Lessees financier.
Negotiating Right of Entry documents in transactions involving the Franchisor if the Lessee is a Franchisee.
It is essential for the success of a Lessee’s business that the Lessee has security of tenure and the right to conduct its business from the premises free from interference by the Lessor.
It is not unusual for lease terms including options to extend into multiple decades so it is prudent for the Lessee to be well represented on all aspects involving the Lease.
A Lessee will want to ensure:
That the Agreement properly reflects their understanding of the undertaking and their obligations.
They understand all of the costs associated with operation of the Lease including the right of the Lessor to increase rent and outgoings and other charges and or demand upgrades.
They are aware of the risks in the Lease Agreement and if not satisfied, seek to negotiate more favourable terms.
They understand the business risks involved including the taking of independent financial and accounting advice as well as consideration of the best tax structure.
They are aware of the maintenance and repair obligations under the Lease.
They have a right of transfer/sale and that there are sufficient options in the lease to sell the business.
Negotiating Commercial & Retail Leases
Everything is Negotiable
You have a right to negotiate better terms. Your relationship with the Lessor may be for up to 10 or 20 years (may be more) so you will want to be assured that your business has the best possible chance at success with a balanced and fair lease agreement.
Ensure the rent is commensurate with the market. It may also be possible to negotiate with the Lessor:
· To apply money to fit out costs.
· To allow a rent free period.
If rent is quoted as including outgoings this is called “gross rent". Seek clarity on the amount of outgoings the Lessee will be required to pay. If the premises is in a shopping centre or a multi tenancy building, the Lessee will be required to pay a proportion of those outgoings. Usually the proportion is specified as percentage of the premises.
If rent is quoted as not including outgoings this is referred to as “net rent”. Consider your Specific Business Requirements. Every business is unique.
Write down all the features in your new premises that you would expect the Lessor to be responsible for.
Never accept the Lessor’s first proposal.
Commercial Lessors and commercial property agents are experts in the leasing process and negotiating terms. Usually the Lessee is at a disadvantage unless the Lessee is an experienced business operator and has numerous commercial tenancies.
What Your Lawyer Should be Doing
There is no such thing as a “standard commercial lease”.
There are a multitude of lease documents in the marketplace with various wordings and terms. These lease terms need to be examined carefully. The work amongst other things will include:
Obtaining instructions from you on your requirements and terms.
Reading the lease and advising in relation to its terms. Many lease are up to 70 pages of small print.
Reading the Disclosure Statement.
Amending the lease and weeding out/advising on the hidden dangers.
Negotiating with the Lessor with a view to securing fair terms and a more balanced document. This may require a number of exchanges with the Lessor/agent/client to get to a finalised agreement.
Title and Plan inquiries on the property.
Signing the Legal Advice Report.
Company Searches on the Lessor.
Attendances to execute the final version of the lease.
There may be further work involved if there are additional documents to be examined such as:
Rent reduction deeds.
A cheap quote from a lawyer usually means corners are being cut, the required work isn’t being done or you are getting substandard representation.
Who prepares the Lease ? It is usual for the Lessor to engage lawyers to prepare the lease terms. The lease is always drafted in such a way that it favours the Lessor. Lease terms can be extremely onerous sometimes making it difficult to do business.
There is no substitute for a proper reading of the lease and a lawyer acting for a Lessee should provide proper advice on the terms of the lease and submit the document back with marked up amendments that:
Are in line with your instructions and expectations.
Provide the basis for a more fair and reasonable agreement.
Keep Some Cards Up Your Sleeve
Don’t appear to be eager to lease the space. Make it clear that you have other alternatives in area that you are considering. Factor into account that in years to come there may be a downturn in the market and you don’t want to be locked into a premises with ever-increasing rent each year. It might be preferable that you negotiate terms that are for example CPI increases or decreases each year but with a capping of say 2% or 5%.
When the Lessor or the Lessor’s agent sends out a “Proposal for Lease”, the Proposal only sets out some of the terms but not all of the terms. By this time a Lessee is usually psychologically and financially committed to the Premises. This puts the Lessor in a position of advantage over Lessee.
To overcome this imbalance we recommend the Lessee:
Sets out precisely what it requires from the Lessor in the proposal so that there can be no argument in final negotiation of the formal Lease Document.
Not move into the premises or commit any expense to moving to the premises or fit out until the lease has been finalised on terms satisfactory to the Lessee.
We have seen far too many cases where the Lessee has already committed itself to the property without truly understanding the terms of the lease only to be shocked by onerous unconscionable terms contained in the lease. Lessee’s should be well warned to avoid this trap.
Have the agent answer all of your enquiries in writing and confirm with the appropriate proofs that:
The business that you intend to conduct from the premises is permitted under the local authority zoning laws.
The building complies with all of the relevant building codes and has a certificate of classification and building approval.
The building is structurally sound. Have the agent provide a building report so that you are aware of any potential maintenance obligations.
Question what outgoings are required to be paid. Some Lessors limit the outgoings to rates and water charges. Other Lessors attempt to include the charges including land tax, operational and management costs. Sometimes the administrative fees include salaries for management and administrative staff, liability insurance costs, professional services such as legal and accounting services. These costs could be astronomical. You should try to negotiate these out of your lease at the “Proposal Stage”.
The costs of maintaining and replacing the building should also be borne by the Lessor out of the rental income. Spending more time in negotiating the terms of the lease at the start may save you tens of thousands of dollars, maybe more, over the life the lease
Town Planning and Building Codes.
Town Planning advice may be required to check on zoning/suitability of the premises and the right to conduct business from the premises. (Most leases will contain a clause that specifically states that the Lessor gives no warranty that the use to be conducted from the premises is lawful).
The Lessee should also independently check that the building is structurally sound, free from leaks and has the appropriate certificate of classification. A building inspection report covering these issues is recommended and will save considerable financial hurt in the future, especially if it is a long lease.
It is essential that there be clarity as to the extent of the work required by each party. In a shopping centre it is usual for the Lessor to deliver a “basic shell” consisting of stud walls, electrical and telephone conduits and plumbing stub in, smooth level concrete floor and rear door.
At the end of the lease you will probably be required to deliver the premises back to a basic shell. This could be an expensive undertaking at the end of the lease. Usually this must all be completed before the lease ends and the Lessor will not usually allow time after the lease for this to be completed.
The space may or may not include heating ventilation and air-conditioning. After that it is the Lessee’s responsibility to complete the fit out before trade commences.
Termination Rights If Sales are Low
The Lessee may wish to negotiate a right to terminate the lease if the gross annual sales are less than an agreed amount. Most shopping centre leases these days require the Lessee to disclose its gross income to the Lessor. Given that the success of a shopping centre tenancy depends upon the traffic flow within the shopping centre, it is not unreasonable to seek a clause that allows the right of termination if the gross sales do not exceed a certain amount.
Having such a clause may protect you from being locked into the rest of the lease term. Many Lessee’s have gone bankrupt because of being “locked in”.
Assignment and transfer.
The clause that gives you the right to transfer the lease when you sell the business is very important. It is essential to negotiate a fair and balanced assignment provision and one that requires the Lessor not to unreasonably withhold approval of the transfer.
Lessors may attempt to change the terms of the lease, increase the rent or require payment of an assignment fee.
There will usually be provisions in the assignment clause to the effect that an assignment occurs when there is change in 50% of the ownership of the Lessee.
The assignment clause should be read carefully. Does the outgoing Lessee and/or it's guarantor's continue to be liable even after the assignment? The consequences could be disastrous because the outgoing Lessee may be liable for the breaches of the incoming Lessee or the new owner of the business.
The Lessor will usually require the members of a corporate Lessee to sign personal guarantees. The effect of this is that those members become liable as if they were the Lessee. While it would be ideal to avoid signing the personal guarantees, it is commercially accepted that personal guarantees be provided as a condition of granting a lease to a corporate Lessee.
However you should attempt to minimise your risk by negotiating a cap on your financial responsibility.
Consider also the position of who bears the risk and pays the costs in respect of repair of any environmental hazard found during the renovation of the premises or during the term of the lease. Leases will usually contain clauses putting the risk back on to the Lessee.
Competition is good but too much can be financially hurtful. Lessors will not usually grant exclusive use terms in a lease, however it should be attempted at the Proposal Stage. Other ways around this include negotiating a clause limiting the number of similar use businesses or limiting certain products that can be sold by other businesses.
Contact us to find out more or to arrange a consultation.