Warehousing

A Beginner’s Guide to Commercial Leases

Close up of an executive hands holding a pen and indicating where to sign a contract at office

Entering into a commercial property lease is vastly different to renting a home. Commercial lease agreements cover various issues that are not encountered in residential leases. Tenants and landlords need to be aware of such considerations when negotiating the lease terms. Here’s an introductory guide to commercial leases and the key issues tenants and landlords face in a commercial leasing situation.

What is a commercial lease?

A commercial lease refers to the legal document which stipulates the rights and responsibilities of the landlord and tenant of a commercial property (a premises that is used solely for business purposes). There are three main types of commercial property: retail, office and industrial (warehouses, factories, logistics and distribution centres, and small ‘flex’ spaces which are used for a mix of office and warehouse space).

Types of commercial leases

There are two kinds of commercial leases - retail and non-retail. Retail commercial leases apply in cases where goods or services are being or will be sold to the the public from the commercial premises. Non-retail commercial leases apply when the premises will not be used to sell goods or services to the public (e.g. a space which will be used for an office or warehouse only).

What does a commercial lease agreement include?

Commercial leases generally include all the terms and conditions set out under standard leases such as:

- who the parties are and the address of the property
- the rental amount to be paid
- when the rent is to be paid
- the lease period
- what is expected of the tenant
- what the landlord will and will not do
- option rights for renewal
- maintenance responsibilities
- any further terms

Commercial leases also normally include fit-out responsibilities and costs (in some commercial leases the tenant is required to pay outgoings such as rates, taxes and levies, water and utilities).

Key things to remember: Landlord

As a landlord, you need to make sure that the commercial lease documentation addresses your needs and that you understand your lease obligations and rights.

Maintenance and fit-outs

Take some time to understand your responsibilities with regards to maintenance and fit-outs. Generally, anything related to the structure of the property is the landlord’s responsibility and fit-out and maintenance are the tenant’s responsibility. However, this can be negotiated diversely. Once the maintenance, fit-out and the party responsible for refurbishing the premises at the end of the lease has been negotiated, these issues need to be clearly documented in the lease agreement.

You should ascertain what the tenant plans to change on the premises and how this will affect the structure of your building.

It is a good idea to discuss any special requirements you may have with your lawyer so that they can be incorporated into the lease documentation.

Finding the right tenant

It is important to find a suitable tenant and ensure they will be able to pay the rent each month and leave the premises in a satisfactory condition (they will need to make good at the end of the lease). The best commercial lease agreements arise from a situation whereby the property owner and tenant work together effectively to draw up an agreement that works for both parties. It is wise to take into consideration that your tenant’s business needs to make money so that they can continue to the pay the rent. Therefore, it is in your best interests as a landlord to work together with your tenant to establish an agreement that facilitates such an outcome, whilst ensuring your needs are met.

uTenant is one of the best ways to find a tenant that is looking for an industrial space just like yours. We take into account tenants preferred lease periods, location, and industrial property requirements to match the right tenants with the right landlords.

Security bond

Make sure you obtain appropriate security on the lease to protect you against a default of the tenant not meeting its obligations correctly under the lease (such as not paying rent). It is common these days to request a bank guarantee from your tenant. Bank guarantees are just as good as cash in the sense that if a tenant should default you’ll have no problems gaining access to the funds. Meanwhile if the tenant provides a personal guarantee (from the directors or shareholders of the company leasing the premises), in the event that the company fails to meet its obligations under the lease you may face a drawn out process trying to obtain any default funds from one of the company directors. Security bonds or deposits are normally equal to 3-6 months’ rent. This is an important point to clarify with your trusted legal representative.

Key things to remember: Tenant

As a tenant, it is vital that the you have a clear understanding of the terms of your commercial lease. Often commercial lease documentation is written by the landlord’s solicitor (which can mean additional costs for you). As there is no industry standard commercial leases can often be confusing and include ambiguous clauses. It pays to invest time and resources in gaining a clear understanding of the terms of your lease agreement before signing on the dotted line.

You need to be completely aware of all your responsibilities as a tenant, from maintenance and repairs to paying the water rates. This information needs to be clearly detailed in the agreement and you should have a solid understanding of the terms regarding these requirements.

Total occupancy cost & rent reviews

Make sure you know exactly what the rental amount is (as set out in the lease agreement) and whether that figure includes the landlord’s operational costs or owning the property. As mentioned earlier, in some commercial leases tenants are expected to pay the landlord’s outgoings so it is important to find out in advance if your rent is inclusive of costs such as rates, taxes and insurance.

Commercial leases usually include a clause providing for an annual rent increase so it is wise to check whether this is an inclusion, the method of rental increase and exactly what the increase will be each year. Then you may be able to negotiate a cap on the percentage increase with the landlord.

Don’t forget, you’ll need to be prepared to pay the landlord a security deposit of an amount between three and six month’s rent upfront. The deposit is generally required in the form of a bank guarantee. You should contact your bank to find out how to arrange this in advance.

You should know exactly what space you are renting (does it include all common areas such as bathrooms, lifts and hallways) and how the landlords measures the space. That way you can decide whether your rent is appropriate for the commercial space in question.

Use clause

Most commercial leases contain a permitted use clause which dictates exactly how you can use the premises. It’s in your best interest to negotiate permitted use as broadly as possible so that you have room to grow and diversify your business over the term of the lease. It is essential that you are aware of any exclusions in the use clause as this will determine what activities you can actually carry out in your commercial space.

If you plan to operate heavy machinery or vehicles in an industrial space you will need to verify whether the lease agreement allows this kind of business activity to be carried out on the premises and whether the zoning that the property is located within allows for this type of activity to be conducted (and the permitted hours of operation). Some properties located close to residential areas may have specific restrictions around the type of business activity permitted and the hours of operation. You can check these permitted uses and hours of operation with your landlord and local council office.

Lease term

One of the most important things to consider when entering into a commercial lease agreement is whether the lease term is long enough to enable your business to achieve desired outcomes and recover your rental investment. Check if and when you have the option to renew your lease for an additional term as changing locations after a few years may be detrimental to your business.

Fit-outs and other changes to the property

Your lease agreement should set out exactly what modifications can be made to the property including fit-outs and specify who cover such expenses (normally fit-outs are done at the tenant’s expense) as well as who will own the fit-out at the end of the lease. You’ll do well to attain a clear understanding of what kinds of changes are considered maintenance and what is considered a structural change.

It is important to keep in mind that there could be provisions in the make good clause for you to return the property to the condition it was in when you entered the property, in which case you will need to cover all the cost associated with doing so at the end of your tenancy. It is extremely important that you are aware of these costs before entering into a commercial lease agreement.

Surplus space

Find out if the landlord will agree to allow for subletting in the lease agreement. If your business fails or you need to relocate, having an assignment or sublet cause in place can save you a great deal of money - it means you have the chance to find someone else to cover the rent. uTenant can help you out if you need to source someone to help you fill any surplus industrial space you may have in your warehouse or facility.

At uTenant, we know everything there is to know about one kind of commercial real estate - industrial leases. We can put you in touch with the right people to assist you with negotiating the lease agreement and help you find your perfect industrial tenant/landlord match. Contact our expert team today to discover the smart way to lease industrial property.