Leases vary in their complexity, size, and terms. Leases like all legal documents, tend to be wordy and are a combination of years of legal doctrine and formality.
A lease presented to you by a landlord will always be written in the best interests of the landlord– to minimise their own risk, probably as advised by their lawyer.
Therefore, it is imperative that you as a tenant have the Lease reviewed by a Lawyer and ensure it is in your best interests and the Lease meets your requirements under the terms. If it does not a lawyer can negotiate the terms so that they are fair and reasonable and reflects your needs as the tenant.
Heads of Agreement
Often before you see a Lease you are presented with a Heads of Agreement or otherwise known as an offer to Lease.
This is an important step as it is crucial this document accurately captures all commercial terms agreed between the landlord and tenant. Usually, the heads of agreement are a 1–2-page document which sets out the main terms of the lease. The importance of having a lawyer review the document before you sign it, is that sometimes the heads of agreement can include terms such as you are required to pay the landlord/lessor’s costs of preparing the lease, or it may contain a harsh rent review or ‘make good’ provision.
What are some of the main clauses to negotiate in a Lease?
The starting rent for the premises
You should check that the proposed rental is competitive with similar properties in the area and that you are not overpaying for the premises. The rent specified in the Lese is often exclusive of GST and Outgoings.
The outgoings and any other fees payable on top of the rent
Under a commercial lease, landlords commonly pass on other costs to tenants. With premises costs being one of the biggest expenses incurred by businesses, it is extremely important to be aware that you may be required to pay more than just the rent.
Outgoings are the expenses associated with the operation, maintenance or repair of the leased premises and can include utilities, council and water rates, body corporate fees and insurance. Often tenants of retail/commercial premises pay outgoings, however they can be negotiated with the landlord.
The way in which the rent will increase upon review (rent review) or the method that will be used for rent review.
There are three common methods of rent review, namely:
- fixed percentage increase;
- consumer price index (CPI) increase; and
- market rent review.
When the rent review is due to take place
Rent reviews generally take place on each anniversary of the lease commencement date.
Ratchet Clauses
There are often ratchet clauses in Leases that means that the Rent cannot be less than the previous year’s rent on a Review Date. This means that if the market has decreased and the rents are starting to decrease that your rent will not be able to be decreased under the terms of the Lease.
Make Good Obligations
Typically, tenants are required to maintain and repair the premises. The contract should articulate who bears the responsibility of maintaining certain systems, such as air-conditioning, to avoid expensive disputes down the track. It is critical that ‘make good’, repair and maintenance obligations are properly articulated to ensure the tenant does not bear unforeseen obligations and expenses, and to avoid costly disputes. Depending on the terms and scope of the make good clause, this could be a significant and costly process.
Guarantee
Often if the lessee/tenant is a company, the lessor/landlord will require a personal guarantee by the director(s) of the company, guaranteeing the obligations of the lessee company to meet its obligations under the lease including the requirement to pay rent.
Getting a lease review – what’s the next steps?
If you need a lease prepared or reviewed or are thinking of re-negotiating the terms of a current lease, FC Lawyers can guide you through the process. Contact our team today to discuss your leasing enquiries or if you need a lease review.
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