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A Brief Guide To Commercial Leases

by Ruben Trevor

Renting a home and leasing a property for your business are two very different propositions. In fact, for anyone looking to enter into a commercial lease, you will find that the considerations are vastly different from those you might be used to when renting a home or apartment. Negotiating a commercial lease is also more complex than entering into a rental contract. It’s a good idea to have trained commercial lawyers Perth take a look at any commercial contract or lease before you sign.

With that in mind, let’s take a closer look at what is involved in commercial leases, the agreements that underpin them and the key considerations for landlords and tenants. And remember, the devil is always in the details – Perth lawyers will be able to help you navigate any difficulties along the way.

 First, what is commercial leasing?

You’re probably already aware that leasing a car, or renting a home aren’t the same as commercial leasing. But what exactly is commercial leasing?

In short , commercial leasing is the lease of property to a tenant for business purposes – whatever that may be. Commercial leases are underpinned by a commercial lease agreement that stipulates the rights and responsibilities for both the tenant and the landlord regarding the lease of the property.

Different types of commercial leases and properties:

Unlike a residential rental agreement for a home, commercial lease agreements can relate to multiple types of property, including:

  1. Retail (like a restaurant or shop)
  2. Office (including multi-story office buildings or an individual office space)
  3. Industrial (Warehouses, factories, ports, logistics centres)
  4. Mixed use (sometimes certain properties will have a mixture of the above, like a brewery which may have a restaurant attached or nearby the brewing facilities).

Depending on the nature of the operation, the above categories may be further categorised depending on whether the property provides retail services, or not.

 What to expect from a commercial lease agreement?

Commercial lease agreements come in many different shapes and sizes. Typically, they include:

  • Names and details of the parties – including the address of the property in question
  • The rental costs, and how often they are to be paid (including the security bond)
  • Details on how long the lease may last – this may also stipulate how and under what circumstances the lease may be extended.
  • The responsibilities and rights of the tenant
  • The responsibilities and rights of the landlord
  • What and how often maintenance should be carried out
  • What areas remain subject to common area maintenance (CAM) such as hallways, lifts, bathrooms etc.
  • Insurance requirements
  • Conditions for subleasing
  • Terms and conditions about the termination of the agreement

What makes a commercial lease agreement different from a residential lease?

While there are many similarities between residential rental contracts and commercial leasing agreements, it’s important to understand the key differences between the two.

The main difference between residential tenancy agreements and commercial leases is that residential tenancy agreements are subject to the Residential Tenancies Act 1987 (WA) which  regulates what a residential tenancy agreement can and cannot include. Commercial leases for retail shops also differ from ordinary commercial leases in that they are subject to the Commercial Tenancies (Retails Shops) Agreements Act 1985 (WA) which also closely regulates what can and cannot be included in such agreements. This means that even if the lessor and lessee agree to waive some terms – they may not be able to due to the operation of applicable legislation. Typically, a commercial lease agreement is bound by contract law within the given jurisdiction – allowing for more potential customisations.

I’m a tenant. What should I be aware of?

Whether you’re a business owner yourself, or the person charged with negotiating a commercial lease on behalf of a business, it’s good to understand the rights and obligations associated with a given agreement. Here’s a rundown of what you should aware of:

1. Read and understand the entire agreement

Commercial leases are usually long, complex documents containing complicated clauses. They’re often drafted by a solicitor, so the language can be very technical. It pays to not only go through the entire document, but also make sure you understand everything that’s in there. This avoids misunderstandings about what the agreement requires of each party, and reduces your chance of inadvertently breaching the lease.

2. Ask about what’s included in the total rent costs

Rates, taxes and insurance. These three things are often excluded from a ‘final’ rent cost and can take tenants by surprise. If you’re examining a proposed lease, be sure to check the exact amount it will require you to pay.

3. Find out about possible rent increases

Leases often include provisions for an annual increase in rent – subject to certain conditions. You’l want to make sure you understand the possible rent review provisions, and double check that this reflects in your financial plan. Remember that a security deposit is often expected at the start of any lease.

4. Be aware of exclusions to the use clause

The use clause is the section dealing with how you may use the property – and for what purpose. Sometimes a commercial lease agreement will exclude certain activities (like the sale of alcohol or selling of goods) from the agreement – making it difficult for business owners to evolve or diversify their business activity.

5. Read up on local regulations before signing any agreement

Be aware that some properties might have special restrictions due to their location. For example, a property close to residential buildings may mean that certain noise restrictions apply. If you plan on operating heavy machinery as part of your business, then this is important information to know.

 Key considerations for a landlord

Just like tenants, Landlords have rights and obligations under a commercial lease agreement. Here are several considerations for landlords who are in the processing of leasing their property to a business owner:

1. Know your obligations when it comes to property maintenance

Typically, the landlord’s responsibility covers aspects related to the structure of the property including the building itself, and sometimes (depending on the agreement) any common areas. Maintenance can be divided between landlord and tenant depending on the cost, areas involved or by other means. Remember that the tenant should be aware of their responsibilities when it comes to the fit-out and maintenance of the property.

2. Ensure your tenant is a good fit

Finding the right tenant for your property can be tough. With so many businesses out there, no two agreements will be the same, nor will the needs of one business match another’s. That’s why successful business relationships between tenants and landlords rely on a sound agreement that is drawn up by both parties in order to maximise the benefits both ways. Remember that the more money your tenant makes, the easier it is for them to pay rent – and the happier they will be renting your premises.

3. Cover your risk with a competitive security deposit

Obtaining a security deposit is an effective method in helping to mitigate risks associated with a tenant not paying monies owing to the landlord pursuant to a lease. Be aware that the larger the security deposit is, the more of a barrier it will be for smaller tenants renting your property. Therefore, measuring genuine risks with the tenant’s ability to pay a security deposit are essential for a successful agreement.

Final thoughts

Both tenants and landlords have an interest in maximising their respective positions and interests when it comes to establishing a commercial lease. However, when disagreements arise, it’s good to be prepared. Engage an expert commercial lawyer today to ensure your best interests are upheld.

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