Four Key Considerations when Reviewing a Commercial Lease
Taking on a new lease over premises from which you want to operate your business is a major commitment. It is important to review the lease carefully.
Here are four key considerations for those looking to lease commercial premises.
1. Consider if the lease is a ‘retail shop lease’
Commercial leases can be divided into retail leases and non-retail leases. In Queensland, the Retail Shop Leases Act 1994 (RSLA) protects retail tenants by setting mandatory minimum standards and imposing certain obligations on the landlord’s part.
The RSLA applies to leases of premises that are used wholly or predominantly for the carrying on of a retail business. There are detailed regulations which set out what is a “retail business” for this purpose. The RSLA will also apply to premises that are not retail shops if they are within a “retail shopping centre”. There are, however, a number of exceptions where the RSLA will not apply, such as for premises with floor area of more than 1,000 square metres.
One of the landlord’s obligations under the RSLA is to issue a Lessor Disclosure Statement to the tenant at least seven days before any new lease is entered into. Failure to do so gives the tenant the right to terminate the lease and claim damages.
Where the RSLA applies, the tenant will also need to provide disclosure statements. Importantly, they will need to have their lawyer and accountant sign certificates confirming they have provided the tenant with advice.
2. Watch out for option exercise dates
Many leases have one or more options, allowing the tenant to renew the lease for a further term. Often, a lease will specify a particular timeframe during which the tenant has to give written notice to the landlord that they want to exercise the option. This period may be, for example, between 9 and 6 months before the expiry of the current lease term. It is important to diarise these dates, so they are not missed.
3. Consider how rent is to be reviewed over the term
Leases will usually provide for the rent to be reviewed each year. Frequently, the rent review is on the anniversary of the commencement date. The three most common forms of rent review are:
- an increase by a fixed percentage;
- an adjustment equal to changes in the Consumer Price Index (CPI) for the relevant capital city; and
- adjustment to market. This usually applies when an option commences and means that the rent will be adjusted based on commercial conditions at the time. The lease should outline a process whereby the parties can negotiate the new rent. If the parties cannot agree, then an independent valuer will determine the rent.
Tenants should also watch out for “ratchet clauses”, which provide that the rent cannot decrease (or cannot decrease beyond a certain amount) following a rent review. Such clauses are void in retail shop leases (they have no effect).
4. Determine what security is required
Usually, a landlord will require some security from a tenant. This is commonly in the form of a cash bond or bank guarantee.
The amount of such security is often based on a certain period of rent – for example three month’s rent. How this is worded is important. Some leases provide that the amount of security must always remain equal to a certain amount of rent. This means that when rent is adjusted each year, the tenant will need to obtain additional or replacement security, which can be costly and inconvenient.
Landlords will often issue guidelines for any bank guarantee. We recommend that tenants pass these directly to their banks. Tenants should also ask their banks if they are able to provide a draft before executing the bank guarantee. This can help avoid potential delays caused by mistakes in the bank guarantee.
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These are only some of the many considerations when reviewing a commercial lease. As Brisbane-based commercial lawyers, we can assist your business with all your legal needs. We are experts in intellectual property, copyright and franchise law, bringing a wealth of experience.
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The information contained on this website is for general guidance on matters of interest only. The application and impact of laws can vary widely based on the specific facts involved.
Accordingly, the information on this site is provided with the understanding that the authors and publishers are not providing legal advice. As such, it should not be used as a substitute for consultation with professional legal advisers. Before making any decision or taking any action, you should consult with a professional lawyer from Rouse Lawyers.
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