commercial lease

What is a commercial lease?

A commercial lease is a document that sets out the rights and obligations of the owner (the landlord or lessor) of a commercial property and a third party (the tenant or lessee) that has agreed to occupy the property.

What is covered under a commercial lease?

A commercial lease is a legal contract covering all the important areas concerning the use and occupation of the business premises. These include:

• The length of the lease
• The rent to be paid by the tenant for the use of the property, and when and how the rent is to be paid
• Rights and obligations of the tenant while they occupy and use the commercial property
• Rights and obligations of the landlord during the lease period
• Any further terms of the lease that both parties need to be aware of

Key issues in rights and obligations

Rent ​​​​​​​​​​​​​​​​​​​​​

Paying rent is the primary obligation of the tenant in a commercial lease. It is also a significant expense in business operation. Generally, a landlord and tenant work out the rent payable and set it out in their commercial lease. A rent can be reviewed yearly. There are three most common rent review methods including:

1. Consumer Price Index (CPI) rent review: a rent increase at the CPI rate.

2. Fixed percentage increase: a rent increase at a fixed rate which agreed by the landlord and tenant, e.g. 4% of current value.

​​​​​​​3. Market rent review: rent value varies in accordance with the market value of the property.

 

It is common for CPI rate or fixed rate to be used for a rent review throughout the term of lease. A market review usually is used at the expiry of the initial term or each option period.

 

Outgoings

Outgoings are the running costs of the building and the premises upon which it is located. It is common practice that the tenant in a commercial lease pays both its own outgoings (e.g. telephone, electricity and gas) and the landlord’s outgoings (e.g. rates, taxes and levies).The commercial lease must specify the responsibility of outgoings payment. It should also detail how the value of outgoings is determined and how they are to be paid.

 

Bond

The landlord generally requires a security bond from the tenant to protect the themselves against a default. A default occurs when the tenant does not properly perform its obligations under the lease (e.g. not paying rent). A bond is usually paid in the form of a bank guarantee or cash deposit. The lease must specify when the bond will be returned to the tenant after the lease has ended and under what circumstances the landlord can withhold funds from the bond.

 

Insurance

A lease often requires the tenant to take out and maintain insurance in relation to the building and its contents, together with public liability. A tenant may also need to obtain other types of insurance depending on their business (e.g. motor vehicle insurance).

 

Payment of legal cost

It is common for the tenant to pay the landlord’s reasonable legal fees for preparing, negotiating and registering the lease. The amount (if any) is a matter for negotiation between the landlord and tenant. The tenant will also have to pay their own legal fees.

 

Repair and maintenance

A commercial lease should clearly explain the tenant’s responsibility on repair and maintenance. It should also outline the landlord’s obligations, such as the roof, common areas like gardens and hallways as well as air-conditioning.The tenant is often responsible for general repairs and maintenance. A commercial lease should set out the nature, extent and timing of the refurbishment.

 

Non-compliance

A commercial tenant must comply with the terms of their lease. Otherwise, the landlord may have the right to terminate the lease and seek damages from the tenant. Given the length of commercial tenancies and high level of ongoing expenses that are often payable under such leases, non-compliance with a commercial lease could be very expensive for a tenant. Hence, it is necessary to establish dispute resolution processes under the lease agreement to minimize long-term issues.

 

And more. Contact us today to discuss your commercial lease matter.