Commercial Leases – All You Need To Know
What is a commercial lease?
A commercial lease is a legally binding contract between a business owner and a landlord for the rental of a space to run a business. This could include an office, warehouse, industrial property, medical center, etc. This differs slightly to a retail lease, which is a type of commercial lease, and covers premises used wholly or predominantly for selling or hiring goods or services to the public.
For many business owners, a commercial lease could be the biggest financial commitment they make in their lives. Naturally, it is best to get good financial and legal advice before going ahead and signing anything. The fact that most landlords propose lease terms that are skewed to their own best interests also adds to the list of considerations a business owner has to take into account when entering an agreement. However, most of the time it’s possible to make negotiations with landlords (unless the market is very competitive, which makes the business owner’s bargaining power low).
Negotiating with a landlord
Some negotiation possibilities when finalizing a commercial lease agreement include:
- Negotiating who pays for the office fit out works, as often times changes need to be made to an office space before moving in.
- Pay attention to the length of the lease – or “term”. A short-lease is usually better for business owners and gives them more flexibility if the needs of the business change.
- Try to get a cap on the amount of each year’s annual increase to rent, or getting rid of the clause altogether.
- Negotiating for an exclusivity clause if possible. No business wants competitors moving into the same building.
- Pay attention to additional fees. These include maintenance and utility fees, which are in addition to the monthly rent.
Don’t forget about the “make good” clause!
An important issue to consider for business owners is the “make good” clause that most leases contain. The clause usually looks something like this:
“At the expiration or earlier termination of the Term, to remove any Lessee’s partitions, fixtures and fittings and to reinstate the Premises to their original condition as at the commencement of the Lessee’s occupancy of the Premises and to make good any damage to the Premises to the reasonable satisfaction of the Lessor. The Lessee must also deliver up possession of the Premise to the Lessor together with all Lessor’s fixtures and chattels in accordance with the Lessee’s covenants contained in this Lease.”
In order words, the tenants are required to reinstate the premises to the original condition they were in at the start of the tenancy. The fit out that was conducted when moving in has to be removed, and at a considerable cost to the tenant. Business owners need to budget enough money and time to make good the premises and attempt be thorough, as opposed to just leave the premises in a good condition.
This is illustrated in a case study provided by the Department of Industry, Innovation, Science, Research and Tertiary Education:
Dispute as to ‘make good’
Phil’s lease is coming to an end and he is required to remove all of his fit out and to repaint the premises and remove any flooring that he has put in the premises, and to generally leave the premises in the condition that he found the premises in when the lease started. Phil does the relevant works and vacates the premises.
However, the landlord calls Phil and says that Phil has not removed the glue residue that he applied when installing his tiled flooring. The landlord is saying that Phil can either come back and remove the residue or the landlord will do it and then charge Phil for the works. The landlord is also saying that the landlord will still be charging Phil rent while the glue residue remains.
It is important to review the make good obligations under a lease. Make good can be a significant cost at the end of a lease. If a tenant fails to comply with its obligations a landlord will generally have rights to undertake the works themselves and charge the tenant for the works or continue to charge rent to the tenant.
To avoid a similar situation like this, contact Symmetry Commercial for professional advice and make good services.