If you own commercial premises that you rent out, a carefully drafted lease agreement is essential. Commercial lease agreements are usually prepared by the landlord (or their legal representative). This is an opportunity to ensure the lease is structured to protect your investment while maintaining a balance of rights between each party and meeting any legislative requirements.
This article outlines some key considerations for landlords to help provide clarity and manage risk when leasing commercial property. It discusses responsibilities for repairs and maintenance and make good provisions; areas that can lead to costly disputes if terms are not clear and comprehensive. The information is general only and we strongly recommend seeking legal advice from an experienced professional when entering a commercial leasing transaction.
General Terms and Conditions
Common provisions found in commercial leases include:
- a description of the premises and its permitted use
- identification and rights of use for common areas
- rent, rent increases and how increases are calculated
- required security deposit/guarantee
- term of the lease, options to renew, and how options must be exercised
- responsibility for outgoings
- repairs, maintenance and make good provisions
- allocation of risk – limitation of liability and indemnification clauses
- insurance requirements
- the circumstances under which the lease may be terminated (for example, breaches, non-payment of rent, insolvency, etc.).
This list is in no way exhaustive and there are numerous other provisions to include depending on the property and the individual leasing transaction.
When negotiating a lease agreement, consider:
- Plain language and definitions – use plain language wherever possible and include a list of definitions to help clarify key terms.
- Proactive communication – communicating openly to address any concerns promptly can help clarify action to be taken and prevent issues from escalating.
- Condition report – a thorough inspection (with photographs) should be conducted and signed off by both parties at the beginning of the lease to document the condition of the premises and establish a clear record. Further inspections can be carried out during the lease to identify any issues.
- Contingencies – the lease should provide for a range of unforeseen events, for example, damage or destruction of the premises.
- Compliance with legislation – for premises defined as ‘retail’, landlords will need to consider their obligations under relevant retail leasing legislation which regulates retail shop leases and requires landlords to follow specific disclosure requirements.
Repairs & Maintenance
Responsibility for repairs and maintenance can lead to a range of issues. The commercial lease agreement will be the primary source for managing such matters so these provisions should be comprehensive and clear.
Repairs may be general or structural and the lease agreement should distinguish between each.
In most commercial leases the tenant is responsible for general repairs to and maintenance of the premises beyond ‘fair wear and tear’. For example, walls, floors, fixtures, doors, windows, and inclusions should be repaired and maintained by the tenant during the lease term.
A ‘repair’ is generally defined as an act necessary to fix something that has been damaged, whether accidentally or from continued use. If a tenant or their staff or customers damage part of the premises, the tenant is responsible for the repairs needed to reinstate them.
‘Maintenance’ generally means taking some action to delay wear and tear or the deterioration or breakage of an item, such as cleaning and servicing plant and equipment or properly disposing of waste and garbage.
‘Fair wear and tear’ refers to the reasonable deterioration of property or elements of a property that can be expected over time, for example, worn carpets and faded paint or wallpaper. It does not include damage caused by negligence or the failure of a tenant to properly maintain something.
Including definitions in the lease agreement on what constitutes ‘fair wear and tear’, ‘structural repairs’, and ‘general repairs’, etc. can help minimise disputes. Determining responsibility for repairs and maintenance to plant and equipment such as air-conditioning and cool rooms can be problematic so these matters should also be addressed.
Typically, the landlord is responsible for repairing and maintaining major structural aspects of the building. This may include repairs to the building support system and foundations, flooring and ceiling structures, column support, roof, and elements that can pose a safety risk. Expenditure of a capital nature is also typically the landlord’s responsibility.
Make Good Provisions
Subject to the lease provisions, tenants may have made improvements to the property such as fitting out premises at the beginning of the lease term to suit the tenant’s business operations.
When a lease ends, make good provisions require a tenant to return the premises to the same state as the commencement of the lease, usually excluding fair wear and tear.
Make good provisions should be clear and easy for the tenant to understand, specifying what must be removed (i.e. the tenant’s personal property, fixtures, fittings and items that were not part of the premises before the lease commenced) and what work, if any, must be carried out (i.e. repainting, recarpeting).
As noted, condition reports are important for establishing a baseline for make good provisions.
Some tenants may be reluctant to restore premises to their original condition, particularly if they have gone to considerable expense in making alterations. Generally, landlords can enforce these rights provided they are included in the lease agreement. In some cases, however, it may be beneficial to both parties for certain fixtures to remain and the make good provisions can provide options for this scenario.
Conclusion
A well-drafted commercial lease is critical for setting the foundation of a good business relationship between a landlord and tenant. Each party’s rights and responsibilities must be clearly outlined to minimise potential disputes with watertight provisions included concerning responsibilities for repairs and maintenance and make good arrangements.
If you or someone you know wants more information or needs help or advice, please contact us on (08) 8155 5322 or email [email protected].