What is an industrial lease?

An industrial property lease is a contract that sets out the rights and responsibilities of the landlord and tenant for an industrial premises.

Key inclusions of industrial leases

Industrial leases contain all the standard terms including:

• Who the parties are
• What their rights and obligations are
• The rental amount and when it must be paid
• Maintenance responsibilities
• The duration of the lease and option rights for renewal
• Option rights for additional lease terms and covenants which provide for things like the use of the premises, fit-outs, subletting and insurance.

It is vital that both tenants and landlords are aware of the implications of these provisions when negotiating the terms of the lease. Whether you are a tenant or landlord, make sure you give careful consideration to the following clauses when entering into industrial lease negotiation.

Permitted use

The permitted use clause dictates what types of activities are allowed in an industrial warehouse.

It is essential that tenants understand that if these requirements are breached, this can result in termination of the industrial property lease. You also need to check with your local council before signing the lease that the zoning of the premises you wish to lease allows for a specific business type.

Make good

The ‘make good’ clause is often one of the most contentious issues during industrial lease negotiations. This inclusion usually means the tenant is required to return the premises back to its original condition prior to the end of the lease regardless of any fit-outs or modifications made in the meantime.

Tenants should consider the costs that will come with removing fit-outs from the premises they are renting once they have to leave.

Subletting and assignment

Having an assignment or sublet clause in place allows for the tenant to find a suitable replacement tenant with the landlord’s consent (for a part or all of the space being rented). This is extremely important from the tenants point of view, as you may find yourself needing to relocate or vacate the premises if your business no longer requires that particular space.

Insurance

Industrial property landlords may wish to include a clause in the agreement which requires the tenant to take out insurance. The landlord will have to be named as an interested party on their policy (or they’ll have to obtain insurance with the landlord).

The insurance required depends on the tenant’s business, but can include the following:

• Public liability
• General property/theft damage
• Plate glass window
• Workers compensation

If something were to go wrong, the tenant’s insurance would cover the event.

Industrial leases vs Retail leases

It is important to note that there is state-specific legislation that governs retail leases, while industrial and other types of commercial leases are regulated by state-specific property and conveyancing Acts.

An industrial lease (being a non-retail lease) can be contracted outside of the property and conveyancing Acts, in which case the law does not interfere with the agreements between the landlord and tenant. Due to this, tenants should enter industrial property lease negotiations with caution and take the time to ensure the lease terms protect their interests and business assets.

Total real estate costs

As a tenant you need to take into account that in addition to your rent, you may also be required to cover operating costs.

Operating costs include:

• Insurance
• Maintenance and repairs
• Taxes and council rates
• Security services
• Utilities
• Other outgoings associated with the premises

These expenses can be passed from the landlord onto the tenant if they are properly documented in the lease agreement.

Security bond

It is general practice for the landlord to require a security bond that is paid by the tenant as protection once the industrial property lease process is complete. This security bond is used for specific instances, such as when a tenant has failed to pay their rent.

The security deposit is generally anywhere between 3 and 12 months’ gross rent (inclusive of outgoings). 

The total amount of the security deposit can also be aligned with the amount of lease incentive that the landlord is providing within the first year (in the form of rent abatement, rent reduction or fit-out contribution) to ensure they are covered. In some cases, the landlord may also ask to review your financial statements for the last 2 – 3 years to help determine the security deposit amount.

Legal advice

Before entering into industrial property lease negotiations, landlords and tenants should have a clear idea of the interests which they are aiming to have covered and prioritised under the lease terms.

While it is not required by law, tenants can benefit greatly from seeking legal advice when negotiating a commercial property lease. It is important to find a commercially minded legal representative whom you trust.

If you are in need of an industrial property, the uTenant platform and the wonderful team behind the scenes can help.

Published: 8 September 2019