Commercial Leasing: Landlord Edition
A landlord of commercial property has the job of drafting the commercial lease. The lease agreement is a complex document that sets out the rights and obligations of the parties. When drafting a lease, the landlord’s lawyer will have regard to the particularities of the property and the tenant’s particular type of business. The use of the premises will impact what the terms of the lease will be. The lease will be comprised of both the general conditions of the lease and the special conditions. Some of these provisions will be essential terms with strong consequences if breached and tenants should have regard to these terms.
The premises are described by the property address and the volume and folio number of property identifier. The size of the premises is also often mentioned and defined in square meters. This is usually included in the Disclosure Statement. A plan of the premises can also be annexed to the lease, which will clearly identify the perimeter of the premises. This gives the tenant a clear understanding of the property being leased and avoids arguments later if there is an issue.
The permitted use of the premises will be defined in the lease schedule. Typical uses are retail, industrial or office. There can, of course, be more specific uses of the premises specified, such as warehouse, hairdressing salon or vehicle servicing, as just three of many examples. It is generally advantageous to the tenant to be less specific about the use of the premises, so as to make it easier to assign the lease should the business not work out or need to be moved to alternate premises. This is because a landlord is often not compelled (depending upon the terms of the lease) to assign the lease to a party wanting to use the space for a use not stated in the lease.
Base rent is usually calculated as a set price based off of the square meterage of the premises. It is a fixed amount.
Turnover rent is an amount of further rent payable, based on a percentage of sales, often over a predefined amount of turnover, This is common shopping center leases. For instance
Outgoings of the Premises:
The lease may be inclusive of building outgoings; typically, though, outgoings are paid over an above the Base Rent and, where applicable turnover rent. Outgoings can include: Landlord ownership and maintenance:
- Electricity, Water, Sewer charges
- Council Rates
- Property insurance
- Land Tax (but not in relation to retail leases in Australia)
- Cost for building personnel, such as security and cleaning
The Security Deposit is the bond of yesteryear. In fact, they are interchangeable terms. The security deposit is paid the landlord prior to handover of the premises to the tenant. Landlords will call upon the security deposit when there is a breach of the lease with a financial consequence and, after demand, the tenant has not made the payment. The tenant will then have to replenish the portion of the security deposit so applied.
Repairs and Alterations
Tenants will be responsible for any damage done to the property but will not be at liberty to alter the structure of the building without the landlord’s prior permission. If repairs need to change the structure, landlords will oversee it and the tenant will be the one charged for such works. Landlords maintain the control over alterations by requiring tenants to ask permission before making any changes to the property.
Tenants are required to take out appropriate insurance. Insurance coverage will include:
- building insurance
- public liability insurance
- landlord insurance
- business interruption insurance
Non-payment of Rent
In the case of non-payment of rent, a landlord may terminate the lease without notice. This can be by way of termination by written notice or lockout of the premises.
Landlords must consent to any subleasing agreement a tenant desires to enter into. The landlord may be asked for substantial references that demonstrate that the tenant is respectable, responsible and solvent as a general rule. Sometimes the landlord can increase the amount of the security deposit. Landlords cannot deny tenants subletting unless there are solid and “reasonable” grounds for denying the new tenant.
Surender of the premises
When the lease term comes to an end, tenants must surrender the premises. Tenants will surrender the premises in the original form the property was handed to them unless the landlord agrees otherwise. This is known as make good.
**This article is for informational purposes only and is not intended to be legal advice. In relation to your individual situation, always seek advice specific to your circumstances from a lawyer.