Understanding commercial leases

We are often engaged to advise tenants of commercial or retail leases. Here are some important points to keep in mind if you are thinking of entering into such lease.

What is it ? A lease is a legal agreement between a landlord and tenant for the use of the premises where the tenant intends to conduct their business. Once a lease is signed, the landlord and the tenant usually cannot end it without the other’s consent unless one party is in breach of its obligations.

What are the key elements ?

  • Start and end dates as well as any option granted to the tenant to extend the duration of the lease.
  • Description of the premises and use permitted under the lease.
  • Amount of rent payable as well as outgoings, bond, other security or guarantee.
  • Responsibility for repairs and maintenance of the property and equipment.
  • Core trading hours.

For how long ? Under the Retail Leases Act 1994, the minimum lease runs for five years, made up of the original term and any options. You can agree to a shorter lease period with the landlord within six months of starting the lease. Make sure the lease period is long enough for you to recover your investment, make a profit, and sell the business if you wish. A lease with fair terms and a long lease period is a valuable asset for both landlord and tenant. It helps improve the landlord’s investment in the property, and the tenant’s investment in the retail business.

For all activities ? Before signing the lease, you must check that the premises can be used for the business you want to run. You cannot use the shop for any other type of business without the landlord’s and council’s consent. If you are taking over a lease when buying a business, you should personally check with the council to make sure that approvals are in place, as well as receiving this assurance from the seller and the landlord.

KEY LEASE ACTIONS

  1. When you find a shop you want to rent: read the draft lease. Get advice.
  2. Seven days before you begin either a new lease or renew a lease: get a disclosure statement from the landlord.
  3. Seven days after you receive the landlord’s disclosure statement: give the landlord your disclosure statement, unless you have both agreed you will supply it later.
  4. Before you sign the lease: the landlord must tell you in writing whether they expect to do any works that may disrupt your business.
  5. After you sign the lease: you can waive the right to a five year lease term by giving a section 16 certificate in the first six months.
  6. You can end the lease in the first six months if the landlord did not give you a disclosure statement before you began the lease.
  7. If the landlord wants to move your shop due to building works, they must give you a relocation notice.

What happens at the end ? When the lease ends, the landlord can rent the shop to someone else. The landlord should give you a notice stating whether they plan to offer you a new lease or not. If the landlord does not issue a notice telling you whether there will be an offer of a new lease, write to them before the lease ends to ask for this notice. The landlord can allow you to stay in the shop after the lease ends. This is usually on a month-to-month basis, which either of you can end with one month’s notice. Unless you have a different arrangement with the landlord, by the end of the lease you must: remove all your property return the shop to the state required by the lease.

If the lease has an option to extend the duration, check your lease to see what you need to do to exercise the option and when it needs to be done. You must tell the landlord in writing before the end of the option period stated in the lease, whether you want to take up this option. If the option says that the lease is to be renewed or extended at the current market rent, ask the landlord in writing what the new rent will be. You have up to 21 days after they reply to exercise the option. If you miss these dates, you lose the right to the option.

If you decide to sell your business, you will usually want to transfer your lease to the buyer. You will need to secure the landlord’s prior approval to the assignment, which involves giving information to the landlord and to the new tenant in order to be released from the financial obligations of the lease. Check www.retail.nsw.gov.au for more information.

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