In this podcast, Legal Practitioner Director Sylvia Lopez discusses the complex nature of commercial leases and agreements.
TRANSCRIPT
Speaker 1:
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Dan:
If you’re a business owner, then it’s likely that you have had a little bit to do with commercial leases. And if that’s the case, you would appreciate the complex nature of these agreements. In today’s podcast, we’re talking commercial leases with Big Law director, Sylvia Lopez. So Sylvia, what is a lease? And when would you enter into such a lease?
Sylvia:
Dan, a lease is effectively an agreement that allows you to enter into possession of property. So this is different to a residential tendency where you enter into a residential tendency agreement. I’m specifically talking and referring to commercial leasing, which is also separate to retail shop leases, which we can discuss at another time. But this is just specifically addressing commercial buildings units and the like. So effectively, it’s an agreement to allow you to enter into possession of that space, to occupy effectively as your own, depending on what conditions are attached to that leasing agreement.
Dan:
And are there common terms in each commercial lease?
Sylvia:
There are. So there are some terms that are provided for in all commercial leases. They can vary slightly, but generally they will hit the main points in relation to their provisions. So obviously things like the term will be a common term or a common clause within the lease. So that refers to the period of time that you will be allowed to be in occupation of those particular premises. So that can vary it. It can be a year, it can be up to 10 years. If it’s a long term lease, then you need to be careful with things like development approval because in certain circumstances that can constitute a subdivision of the property. So there needs to be some care and thought given as to the term. Most commonly leases for commercial premises are generally somewhere between three to five years.
Dan:
Right. And what about some other clauses? I’m assuming rent and security that you might need to provide and maintenance obligations, those type of things?
Sylvia:
Absolutely. So you need to know how much you’re going to be paying for the right to occupy the premises. So there will be a starting rent that you will agree with the leasing agent at the time that you’re negotiating the lease. Now, that is usually calculated based on the space that you’re occupying by reference to the net lettable area. So you’ll work out a square meterage price for the premises, essentially. That can vary greatly depending on where your premises are of course. So if you’re in the city, you might be paying at the moment somewhere between six, seven, $800 per square metre. If you’re out in the suburbs, well, then that will vary again. So it’s important that you do some due diligence around what the rent should be and what you are prepared to pay for that space.
Sylvia:
The lease will also provide for trigger points for the rent to be increased throughout the term of the lease. So that can be through various different components. For example, you can have rent that is increased by CPI, so we look at how much the CPI has changed from year to year to work out what your new rent is. Or you can have fixed interest increases where you and your landlord agree that the rent might go up by 2%, 3%, 4%, whatever the figure is that you agree, and you have certainty that is what the rent will increase by from year to year.
Sylvia:
Sometimes leases will include options to renew, so the landlord will agree that at the end of the current term or the initial term of the lease you have the right to exercise the option for a further term. Now, if you choose to take that up, there’s usually provision for a market rent review. So you’ll go out to market and you’ll see what the market is doing in terms of rent and how much people are paying. The trick with that is understanding that a market review in commercial leasing will generally not entitle you to a rent decrease unless the lease specifically provides for that. It very commonly does not. In fact, it will include what we refer to as a ratchet clause, which will say the rent can’t decrease below the rent that you were paying the year before the market rent review. So you need to be very familiar and understand how your rent will increase from year to year during the term of the lease.
Dan:
Sylvia, what about that clause that probably catches lots of business owners out, and that being the make good clause on the exit, what does that actually mean?
Sylvia:
Sure. So that’s what you’re going to have to do to hand the premises back to the landlord. So that can be as little as cleaning it and repainting it, or it can be as much as, you’ll always have to remove your fit out, but removing all of your fit out and taking the premises back to what we refer to as back to a base configuration. That could require electricians to come in, removal of partitioning, repainting, recarpeting. So you need to be very aware of what you will be required to do at the end of the lease, because all of those things can add up to significant amount of amounts of money.
Sylvia:
And if you don’t do that, then you’re more than likely going to have provided security under your lease. Now, that will be in the form of a bank guarantee or a security bond, which will be equivalent to it could be three months, six months worth of rent that the landlord will be holding a security for you to perform those obligations and other obligations under the lease. So if you don’t do those things, then they can very well dip into that money to rectify those things or undertake those works.
Sylvia:
Sometimes you might have a personal guarantee in place, which means that if there is an issue or a default under your lease, particularly things like make good, then the landlord can come looking for you personally to fund or provide sufficient funds to do the works and rectify any breaches that may not have been complied with by the tenant. So really important to understand what that obligation’s going to look like at the end of your lease.
Dan:
You’ve only got to look at the length of a typical commercial lease agreement to identify that these are complex contractual relationships that a business owner is entering into. It goes without saying, getting legal advice on this is just common sense.
Sylvia:
Common sense, and absolutely critical. So we definitely encourage people to come in, let us have a look at that lease for you, go through it with you. We can then negotiate any amendments that need to be put in there to protect your interests and get you signed up and get you off into occupation that you’re not going to have issues with or be regretting at the end of the lease or indeed throughout it in your relationship with the landlord.
Dan:
Sylvia, thanks for joining me.
Sylvia:
Thank you, Dan.
Speaker 1:
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