As a business owner, signing a lease is a big decision and can be one of the first large financial transactions you enter. Given this, you should do proper due diligence by seeking legal advice on both the premises and the terms and conditions of the lease.
It is important to ensure that the commercial lease reflects the agreement between you and the landlord, and that the document is kept within the boundaries of the law. Keep in mind that these legal requirements are different in each State.
What is a commercial lease agreement in NSW?
A commercial lease agreement is a document which grants you an exclusive right to use the premises, sets out the terms of the lease and the rights and responsibilities of both the lessor (the landlord) and the lessee (you, the tenant).
It typically deals with:
the length of the lease and options to extend;
the amount of rent payable and how this is increased;
if the tenant is responsible for outgoings, such as council rates;
what the tenant is permitted to use the premises for, such as a hairdresser that sells related products;
who is responsible for maintenance and repairs of both the premises and the fixtures; and
what indemnities and liability are applicable regarding any injuries, damages or claims.
The above are all important factors to consider before signing a lease and should be examined carefully.
If you’re planning to lease a retail premises, it’s important to know that there is legislation specific to those agreements. In NSW, it’s the Retail Leases Act, but there are various other pieces of legislation across the States and Territories that are retail lease specific.
A retail lease is usually a shop either in a shopping centre or retail area, although can exist outside of these, and is wholly or predominantly used for selling goods and services to the public.
The Retail Leases Act was established primarily to protect tenants when entering into lease agreements as most retail lease premises are in large shopping centres where the landlord holds the bargaining power. The legislation therefore requires the lessor to provide a higher degree of disclosure of terms prior to entering into the lease and it also deals with mechanisms to resolve disputes between lessors and lessees.
What do outgoings include in a commercial lease?
An important part of a commercial lease agreement is detailing the outgoings.
Outgoings are expenses related to the premises that you agree to pay in addition to the rent. The lease and the landlord’s disclosure statement, in the case of a retail lease, must clearly specify the outgoings that you have to pay. Outgoings are often a major cost for the tenant and should be considered carefully.
Some of the usual outgoings are:
local council rates and charges;
later sewerage and drainage charges;
strata or community levies; and
management fees if a managing agent is appointed.
Other types of outgoings may be included in a lease, and each should be identified at the negotiation stage and an estimate provided so the cost is disclosed and understood by both parties.
Can a commercial lease be terminated early?
As a rule, you should always ensure you are able to see out the full term of the lease from commencement, but there can be a number of reasons why you would want to terminate a lease early. Maybe your business is unprofitable, or you’ve realised that you need a different or bigger location.
Whatever the reasons, breaking lease obligations is usually considered a breach and the landlord may be entitled to recover damages including all unpaid rent and expenses for the rest of the lease term.
While not ideal, there are several ways a lease can be terminated early by the tenant without incurring such costs.
The first option is to assign, sublease or transfer the lease. This requires that you or the landlord find and locate a new tenant. It may be looking for someone to take over the premises, or you might want to sell the entire business, together with the lease. You may require the landlord’s consent to assign, sublease or transfer the lease and this is usually found in the lease or the relevant legislation.
Alternatively, you can surrender the lease. Many leases may not contain a specific surrender clause. The landlord may, at their discretion, consent to you surrendering the lease usually on satisfying certain conditions, such as paying out a certain portion of the remaining term’s rent.
Can a landlord refuse to renew a commercial lease?
Another key factor to consider when entering a lease is whether the landlord can refuse to renew the lease for a further term.
If the lease does not contain an option period and the term of the lease is coming up for expiry, you can be refused a lease renewal. However, if there is an option and you exercise your option correctly, the landlord must provide you with a lease on the same terms for the option period with rent adjusted in accordance with the rent increase mechanism.
There is no legal requirement for a landlord to renew a lease. However, most leases give the tenant an opportunity to ‘hold over’ the lease and stay in the shop on a month-to-month basis at the end of a fixed term with either the landlord or tenant able to give one months’ notice to terminate the lease.
Resolving lease agreement disputes in NSW
If you are already in a lease and in a dispute with your landlord, there are a few steps to follow.
The first step is to read the terms of the lease carefully. Often, there will be a dispute resolution clause which will outline the steps you and the landlord should, or must, take to attempt to resolve the dispute. Usually, this begins with an informal discussion with your landlord where you both try to reach an agreement.
If you can’t reach an agreement following the dispute resolution procedure, you will need to follow the formal process set out in the relevant State or Territories legislation.
If this is a retail lease, the Retail Leases Act will apply, which has mechanisms and processes for resolving a dispute:
If mediation is unsuccessful, both parties will receive a certificate from the NSW Small Business Commissioner which must then be attached to the application to NCAT if the parties wish to progress the dispute.
A lease is a binding agreement and failure to comply with the terms of the lease could have significant consequences and financial costs. It’s a big decision, so it’s important to seek legal advice prior to entering a lease.
A lawyer knowledgeable in commercial leasing can provide you with advice on the terms of your lease and advise on which clauses or items you should negotiate or remove from the lease.
If you require legal advice about a lease you’re about to sign, or one that you already have, contact our Business Team here at Turnbull Hill Lawyers.