Leasing a building

There are some basics that prospective tenants should know about leasing buildings. Although these are not rules that are cast in stone, they are the usual starting points with regards to leases.

AGREEMENT TO LEASE

Generally when terms are being negotiated, the tenant and the landlord will first sign an "agreement to lease" rather than an actual lease. This is a short (1 to 3 pages) document which sets out the terms and conditions and commits the parties to signing a full lease  (often 12 – 15 pages or more) at a later date. Using this process generally enables the practical side of the deal – the parties are committed,and the tenant can move in – to occur far quicker than if lawyers were involved immediately in drawing up a lease.When the agreement to lease is signed, a deposit is payable, which generally amounts to two or three months rental.If , for instance , the deposit is two months rental, then the next rental payment will be due two months from the commencement of the lease.

TERM OF LEASE

Each lease will have a term that it runs for.This term can vary significantly – from one year to 10 or more years. Generally the term will relate to a combination of the size of the building and the amount of specialised fitout both the tenant and the landlord need to do.
The tenant is committed to stay for the period of the lease, and the landlord is committed to allowing the tenant to remain. Should the property be sold during the term of the lease, it does not alter that commitment.
Following on from the initial term there will usually be a "right of renewal". This means that the tenant can choose, at the conclusion of the lease, whether they want to stay on for the period specified in the right of renewal. Note that the right of renewal is purely for the benefit of the tenant – the landlord does not have any option.

WHO PAYS FOR WHAT?

Generally the tenant pays for everything !
The landlord is responsible for keeping a building watertight and structurally sound, but beyond that, the tenant will pay everything else – that includes what are generally known as OPEX (operating expenses), and these include council rates, insurance and such things as gardening costs.In many cases the landlord will pay these charges , which are billed to the building owner, and the tenant will re-imburse the owner.
The tenant will also pay for services such as telephone and electricity, which are usually arranged for by the tenant and billed directly to the tenant. However, water (and wastewater charges) are generally billed to the building owner, and then the tenant reimburses the landlord.
It is worth remembering that generally the landlord has no margin on these various charges, and the expectation is that they will be paid immediately. They are not an account to be paid on the 20th of the month.

RENT REVIEWS

How often the rent is reviewed will be stated in the lease, but very often it is every two years. The most common formula is that the rent is reviewed to "market" rental. Sometimes this will require a valuation to determine what the current "market" is, but often it is determined by negotiation. Often where a valuation is required, it ends up being two valuations – as even valuers have different ideas on what market price is.
It is worth noting that most leases will include a ratchet clause – in other words the rent can go up when the market goes up – but it cannot go down. In some cases
The rent is reviewed by the amount of increase of the CPI (Consumer Price Index) However, this is becoming less common, partially because the CPI can go up, even in times when market rentals do not – or vice versa.

TERMS IN LEASE

A lease (or an agreement to lease) basically spells out the responsibilities  and duties and obligations of both parties. Often, and particularly with smaller limited liability companies, there will be a requirement that an owner or director of the company guarantees the rental.
One of the major obligations on the part of the tenant, is to pay the rent by a certain day, and increasingly in a certain manner. Generally it will be spelled out that the tenant must set up an automatic payment for the rent.

WHAT CAN A TENANT DO WITH A PROPERTY / BUILDING?

What a tenant can use a property for is set out in the agreement to lease , and then in the lease itself. Therefore it is incumbent on the tenant to ensure that at the outset it is stated what the use for the property will be.
Other than the wishes of the landlord, there are two major factors which will determine what are acceptable uses : Council zoning and Body Corporate rules.
Every property is within a certain council zone, and  the rules for each zone will determine what activities can be carried out within particular zones.The zoning rules are complex and very often ridiculously arbitrary. However, they are the rules, so it is worth ensuring that your proposed activity complies, before signing a lease.Although from a practical sense there are many activities which do not in fact comply with the zoning they are located in, the reality is that the local council does have the ability to close down businesses which do not comply.
Where a building is located within a body corporate, then the activity in each building must comply with the body corporate rules. These rules are formulated to ensure that all occupiers of  a particular body corporate have what is termed "quite enjoyment"of their property – whether they own or lease it. Simply, this means they are not annoyed or disrupted by the activities of other occupiers. Very often rules os a body corporate may exclude activities such as metal working (because of the noise it creates)  or panel beating (because of the dust it creates or cabinet making (because it increases insurance premiums for all occupiers in the complex). Again, it is worth checking body corporate rules before signing an agreement to lease to ensure that a particular use complies.