Leasing a building
Here are some of the basics that prospective tenants should know about leasing commercial / industrial property:
AGREEMENT TO LEASE
Once the terms of a lease have been negotiated, the tenant and the landlord will usually sign an “agreement to lease”. This is a short (1 to 3 pages) document which sets out the terms and conditions, and commits both parties to signing a full lease (often 12 – 15 pages or more) at a later date. Once the “agreement to lease” is signed, and the deposit paid, both parties are committed to the deal. Later on, the formal “Deed of Lease” will be drawn up by lawyers.
The deposit is usually the first 2 or 3 months rent.
TERM OF LEASE
Every lease will have a fixed term that it runs for. This term can vary significantly. A small storage shed may be a term of one month. A supermarket may be ten years or more. The tenant is committed to staying (and paying rent and outgoings) for the term of the lease. The landlord is committed to allowing the tenant to remain. Unlike a residential lease, the landlord or the tenant cannot give notice and end the lease early. Should the property be sold during the term of the lease, the new owner/ landlord is still committed to allowing the tenant to remain.
Following on from the initial term, there will often be a “right of renewal”. This allows the tenant to renew the lease for the period specified in the right of renewal, or vacate if they want to. A “right of renewal” is valuable to businesses that depend on their location to attract custom. The right of renewal is purely for the benefit of the tenant – the landlord does not have any option. Note that there is sometimes confusion about the term of the lease. It is the length of time until the next renewal, not the time until the final expiry date.
Generally if a right of renewal is to be taken up by the tenant, then the landlord needs to be advised of this in excess of 3 months prior to lease end. The tenant cannot wait to the end of the lease and then notify the landlord that they wish to stay. The 3 months notice then gives the landlord time, in advance of the tenant departing, to attempt to find a new tenant.
How often the rent is reviewed will be stated in the lease. Very often it is every two years. The most common formula is to review the rent to “market”. Often this will require a valuation (by a registered valuer) to determine what the current market level is, but often the new rental is arrived at by negotiation between landlord and tenant. In some cases the rent review will be determined by CPI (consumer price index ), or by fixed increases included in the lease document from commencement.
It is worth noting that most leases will include a “ratchet” clause. This means that the rent goes up when the market level increases, or the CPI increases, but it cannot go down.
WHO PAYS FOR WHAT
Usually the tenant pays for everything!
The landlord is responsible for keeping a building watertight and structurally sound. Other than that, the tenant will pay what are generally known as OPEX (operating expenses). These includes council rates and insurance (usually the 2 largest items) plus gardening costs, and maintenance of doors, gates, airconditioning etc. The tenant also pays for telephone, internet, electricity, water and wastewater charges.
WHAT IS IN A LEASE?
The lease (both the agreement to lease and the Deed of Lease) spells out the responsibilities, duties and obligations of both the tenant and the landlord, and also how difficulties are remedied if things don’t go well.
One of the major obligations on the part of the tenant is to pay the rent by a certain day. Often it also specifies that the rent must be paid by automatic payment.
The lease also sets out things such as how and when the landlord is able to enter the property.
It is worth reading a lease document, as it sets out exactly how the relationship between landlord and tenant should work. There is a lot of legal language, but often tenants sign up to lease a building without fully realising what their obligations are.
WHAT CAN A TENANT USE A PROPERTY FOR?
There are 3 sets of rules to consider when thinking about what you can (and cannot) use a property for.
Council Zoning: The rules for each local Council zone will determine what activities can be carried on within a particular zone. These rules are complex and often somewhat arbitrary. But it is worth reading the rules as the council has the power to shut your business down if you are operating in the wrong zone.
Body Corporate: If a building is located in a complex run by a Body Corporate, then there will also be rules as to what you can and cannot do in and around the building. It is best to check the Body Corporate rules before signing a lease to ensure that your business use fits within those rules.
Lease: The Deed of Lease will set out what the premises can be used for.