The post-earthquake property shortage affected not only residential property but commercial as well. The reduction of available space and amount of tenants needing to relocate found tenants pressured to sign up to a lease with little ability to negotiate or consider the terms. But skip forward eight years and the market has changed. With anchor projects underway, the CBD taking shape and private developments up and running, it is a great time to negotiate a good deal for commercial space.
We are often asked to prepare a ‘standard’ lease for both landlords and tenants. This instruction may appear simple but there is effectively no such thing. Every development is different and every business is unique. Many factors affect what type of deal you enter into including; the market, the industry, your business history, and the location, to name a few. Larger developments often find it more cost effective to create a bespoke lease tailored to their needs. Investing in correct advice at the start will have endless benefits during the term of the lease and avoid additional costs later.
Whether you are buying an investment property or looking for space to set up your business, you need to familiarise yourself with commercial leasing. We recommend that any lease is reviewed by your solicitor before signing to ensure it meets your needs, however, we have provided answers to some of the more common queries we receive below.
What are my rights with the property after I lease it?
A commercial lease passes significant rights to the tenant during the term of the lease. More often than not a tenant has the right to update, fit-out, maintain and vary the property to suit their business. Some works may need consent from the landlord but in general, you can treat the premises as your own. Tenants do need to fully grasp the exit requirements before spending considerable amounts of money on any developments to the property. Ownership of fixtures and fittings installed by the tenant and the cost of removing these items at the end of the lease often lead to disputes. These disputes can be avoided by a clear lease being prepared at the start.
How much should I pay?
The rent is often negotiated between the parties before any documentation is prepared, but it is the additional costs that can come as a surprise. The Landlord’s operating expenses (opex) are usually passed on to the tenant. This will likely include rates, insurance, maintenance, landscaping, body corporate fees, rubbish collection, and utilities. Being aware of what is included in the opex is important and again relies on good drafting at the start of the lease. If you are in a shared property these costs may be split. How that is administered by the landlord should be disclosed in the lease.
Your lease may also include rent reviews. These might be based on a market review, an increase based on the Consumer Price Index (CPI) or a fixed increase each year. CPI and fixed increases provide tenants with certainty but a market review does not. We check leases to ensure any market review is fair and transparent and has provisions that allow a tenant to dispute the amount without it costing more than the increase itself.
What if my situation changes, can I get out of the lease?
As a general rule landlords do not have the right to terminate a lease during the term and neither does the tenant. There are benefits to you by having this certainty, however, it does present issues in the event your business closes or you want to relocate. Ensuring leases for new businesses, in particular, allow the right to assign or sublease is your best form of protection in this regard. Tenants need to understand that this may assist you to move on but there are ongoing liabilities to the Landlord until the lease ends. Tenants considering vacating your premises should seek legal advice as early as possible to go through the options provided in the lease.
If tenants are liquidated or bankrupt during the term of a lease there is legislation to govern how this is managed. These are technical areas of law and specific legal advice will be required.
Can I get any assistance from the landlord?
This depends on the market and what type of property you are leasing. Incentives may be offered by some landlords to entice tenants into a property. These include rent-free periods, contribution to fit-out costs or a staggered rental amount based on turnover. Ensuring you get advice prior to signing the lease allows room for negotiation of such points.
What security should I be seeking?
If your tenant is a company it is common to ask for a personal guarantee from the directors of the company. However, you should ensure you know what assets (if any) both the company and the individuals have. Having a personal guarantee from someone based overseas or with no assets or income will not provide any security in the event the company is liquidated. The old adage of ‘you can’t get blood out of a stone’ applies.
Knowing your tenant’s business history may help but if you are dealing with a complete unknown or a startup business, there is a high risk of being left with unpaid rent and boarded up premises. In these situations, the best form of protection is a bank guarantee or bank bond. The bank will hold a certain sum and in the event, the tenant fails to pay the bank can release funds directly to the landlord. The form of the guarantee and ensuring it is a condition of the lease is something we can attend on your behalf.
What costs can I pass on to a tenant?
The short answer to this is most of them provided the lease is prepared correctly. There are usually some limits such as structural repairs and anything covered by your insurance but this is not always clearly defined in a lease. We can assist in providing a list and mechanism for administering these costs.
What if my tenant stops paying?
Firstly you could enforce any security that is included in the lease. If this is not satisfactory or available and the default is ongoing a landlord has rights under the Property Law Act 2007 (the Act), such as the right to take back control of the property. There are very prescriptive notice and timeframe requirements that need to be met and legal advice should be sought. The implications of not meeting the requirements of the Act could mean a landlord is liable to the defaulting tenant for costs or damages, so getting this process right is essential.
These questions barely touch the issues that should be considered when entering into a lease. As previously stated, the best way to ensure your lease meets your requirements is not to look for the ‘standard’ but spend time on professional advice at the outset. Understanding what you have entered into and your rights and obligations will ensure a long and happy relationship between landlord and tenant.