By Jesse Sharp.
Managing Partner Jesse Sharp brings a broad commercial expertise to assist clients with their commercial leasing, commercial transactions, corporate structures and wills and estate planning. Having spent his career at P&B Law and its predecessor firm, he takes great pride in his long-standing client relationships. He is focused on ensuring P&B Law provides clients the practical support they need to assist them to succeed and grow.

Common Questions about Leasing your Commercial Property

Your commercial property is an important income-generating (and hopefully capital growth) asset. A good tenant and clear lease arrangements will help you make the most of this asset. However, the process of finding a suitable tenant and negotiating the lease of a commercial space can feel daunting, particularly for inexperienced landlords.

When we draft, review or negotiate a commercial lease, we walk clients through the process and guide them on tips and potential traps. The following issues are some of the most common concerns we see.

1. Planned Use of the Premises – What do you need to Consider?

The lease should set out the permitted use of the premises by the tenant. A broadly drafted permitted use will leave open the nature of business that the tenant can operate from the premises. As a landlord, before you rent out your commercial property, it’s important to consider carefully what permitted use you are prepared to allow, as this can cause issues such as:

if the Retail Leases Act applies or not;
insurance risk for the premises;
supply of services required such as water, gas and electricity;
the nature of the fitout that may be required; and
tenancy mix in the building and the effect it might have on tenancies.

The more specific this can be, the better for the landlord. We often suggest avoiding generic terms such as “Office”, "Restaurant" or “Retail” and suggest being more specific such as "Architect Office”, “Chinese Restaurant" or “Clothing Retail”.

This issue should be discussed between landlord, tenant, agent and with your lawyer as part of the drafting of the lease.

Planning and Zoning

The tenant will generally be responsible for confirming their proposed business is permitted under relevant zoning and planning laws. However, we recommend landlords also check this early. That avoids spending time and costs on negotiations only to find the tenant cannot proceed with their intended business due to zoning issues, or that obtaining the required permit will be costly and cause delay.

2. Does it make a Difference if it is a Retail Lease?

Most states in Australia offer certain legal protections to tenants that are conducting retail business from a commercial property. In Victoria, the relevant law is the Retail Leases Act 2003 (RLA). A ‘commercial lease’ refers to a lease of a commercial property irrespective of the use (other than for residential) and a ‘retail lease’ describes any commercial lease that falls under the RLA. Meaning that all leases of a commercial property are ‘commercial leases’ but not all commercial leases are also retail leases as not all are covered by the RLA.

As a landlord, it is important you get advice on whether the lease falls within the scope of the RLA. This may not always be obvious. A lease over the same premises may sometimes be a retail lease and sometimes not, depending on the tenant, their business and their customers.

If the RLA does apply, it sets out certain statutory protections for the tenant and extra obligations on the landlord, which cannot be excluded. These include:

the landlord’s obligation to provide a disclosure statement;
the prohibition on the landlord recovering land tax as an outgoing;
setting out the clear requirements in respect of a market rent review which among other things prohibits a ratchet clause; and
a requirement for the landlord to give certain notice to the tenant in respect of further options and end of the lease

The schemes vary from state to state, so if you are outside Victoria it is important to get advice from lawyers familiar with that jurisdiction.

3. Lease Terms and Renewals – What Issues Do They Raise?

There is no minimum term for commercial leases. However, under a retail lease, you must offer tenants a minimum term of at least five (5) years, including options to renew. Retail tenants wishing a shorter term will need to waive this entitlement by applying to the Victorian Small Business Commissioner for a waiver certificate.

In the event that building works could be planned, either to demolish the whole building or significantly renovate it, then it might be worth including a demolition clause in the lease. This clause will allow the landlord to terminate the lease early, with the agreed notice period to the tenant in the event that the landlord is intending to redevelop or demolish the building. It is often worthwhile to seek to include such a clause if there is an intention to sell the property and the likely purchaser is going to want to develop the site.

4. Outgoings – Who Pays for What?

Consider whether you will require the tenant to contribute to your expenses of ownership of the property (often referred to as outgoings) such as:

general building maintenance;
owners’ corporation fees or sinking funds;
insurance;
cleaning;
local government or water rates; or
waste management.

If the RLA applies, you must give the tenant a disclosure statement at least 14 days before the commencement date. If you require the tenant to contribute to outgoings, you must state this in the disclosure statement, specify how they will be apportioned and provide an estimate.

5. Who is Responsible for Maintenance and Compliance?

Landlords generally are responsible for maintaining the structure of the premises, fixtures, plant and equipment and utilities in the condition they were at the start of the lease.

However, tenants generally are responsible for general repairs and maintenance of the premises as well as any capital work that is required due to the tenant’s misuse of items. This can be a source of conflict, between determining if something simply needs general repairs or maintenance so is an obligation on the tenant, or needs structural or capital work which will be the responsibility of the landlord.

Essential Safety Measures

Consider also how you wish to deal with maintenance of essential safety measures such as smoke detectors and fire alarms.

Since 23 September 2020, landlords can pass on to retail tenants the costs of repairing and maintaining these measures. However, you must stipulate this in the lease and disclose the costs in the disclosure statement or annual estimate of outgoings.

6. Fitting Out the Premises – What are the Options?

Fitting out the premises for the prospective tenant is generally a matter for negotiation between landlord and tenant.

You may need to complete some basic works such as painting and carpeting to get the premises ready to lease.

It may be appropriate to leave the actual fit-out to the tenant, but you may need to offer some kind of contribution or rent concession for the time taken to complete the fit-out. The lease should specify the obligations of each party. Is the tenant taking the premises as-is and any fit-out costs are entirely a matter for the tenant, or is the landlord agreeing to undertake some work?

The timing of these works will also be relevant to the lease. You may need to get works completed prior to the commencement date of the lease. Landlords are sometimes prepared to offer a tenant early access to the premises so they can undertake their works. In which case you also need to consider insurances, security and any other conditions attaching to that early access.

7. How can you Screen Prospective Tenants?

Before approving a tenant, landlords need to assess their ability to meet their obligations under the lease.

Documents to ask for include:

a statement of assets and liabilities signed off by an accountant;
recent bank statements;
title searches to confirm ownership of any properties;
business and leasing reference; and
business plans.

Note - assets such as superannuation should not be considered when assessing a tenant, as these funds cannot be used to meet the tenant’s obligations under the lease.

As well as the prospective tenant’s financial resources, consider whether you are satisfied they will be able to run their business from the premises as planned. For example, a detailed and considered business plan backed up with past experience in running the type of business, is likely to be more reassuring than a document that appears to be generated by AI as a box ticking exercise. Their business resources and support, including whether they have an accountant to review financial documents can also be relevant.

Knowing your Tenant

Make sure you are clear who will actually be occupying the premises. That may not be completely clear, for example if you are negotiating with a corporate entity or trust.

Negotiating with franchises can also raise complications, where the lease is with the franchisor but the premises will be occupied by a franchisee. That can become important if the corporate or franchise structure makes it difficult to access the actual person occupying your premises.

8. What Securities or Guarantees Should you Ask For?

If your prospective tenant is a company, you will often want personal guarantees from the directors and / or shareholders, depending on the case. It is important to check the title to any property that a guarantor claims to hold, as a landlord needs to ensure that the party giving the guarantee is also the title-holder and not merely the spouse of the title-holder.

Tenants may also offer bank guarantees or cash deposits. If you do accept a cash security deposit, you need to register your interest on the Personal Property Securities Register (PPSR). This protects your interest in case the tenant goes into liquidation.

Tenants may (but not often) also offer security deposit insurance, in which case you need the tenant to provide evidence of this insurance before the commencement date and make sure you as the landlord are listed as the beneficiary of the policy.

It may also be helpful to request a prospective tenant to sign a heads of agreement and pay a deposit to continue lease negotiations. This helps protect you in case they withdraw for their own reasons. As the landlord, you can recover your costs for preparing and negotiating the lease up to that point. If the lease goes ahead, the deposit will be used towards the first month’s rent.

Conclusion

The time you spend on getting good advice and making sure you have a strong and well-thought-out lease agreement is an important investment.

Thinking through the practical issues that may affect the landlord and tenant relationship at the outset will help make sure the lease protects your interests as a landlord. It will also make for smoother negotiations and a more productive landlord–tenant relationship.

Get practical and commercial advice on letting out your commercial space

As a commercial landlord, you want to feel reassured that you’ve found the right tenant and protected your valuable investment. At P&B Law, our lawyers are experienced in advising on all types of commercial and retail leases. They will walk you through your negotiations and help you avoid potential pitfalls. Contact us today to benefit from our knowledge.

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