Relationships with your Landlord - Understand the Terms of your Lease

Posted by Malcolm Campbell on 03 August 2016
Relationships with your Landlord - Understand the Terms of your Lease

Like many legal documents, leases can be long, often written in confusing or cumbersome language. It’s no surprise then that many people don’t get past the first few pages before they give up trying to make sense of it all. However, understanding the content, meaning and effect of your lease can enable a business operator to extract the maximum value and commercial advantage from your premises.

Below are some of the key areas of your lease you must ensure you properly understand.

Property subject to the lease

It is very important that the lease accurately and clearly describes exactly what is being leased. It is preferable a plan showing the location and dimensions of the property leased is attached to and forms part of the lease. Things like car parking and separate storage areas should also be clearly marked on the plan.

Lease period

A lease grants the lessee the right to occupy and have quiet enjoyment of the premises for a stated fixed period of time. Irrespective of who may own the property and whether it is sold during the lease term, the lessee has the right of occupation for the period of the lease.

Option to renew

Leases can contain option(s) for renewal of the lease. If properly exercised these options grant a further term of lease to the lessee on the same terms as the original lease.

In order to be secured an option must be exercised by the lessee in the specific manner as set out in the lease.

Rent

The headline issue for any lease is the cost of occupation – the main factor as to cost is of course the rent.

It is important for any prospective lessee to do their research – know what the prevailing rates are for the types of premises you are looking for in your area. Make sure you are comparing like for like – differing styles of properties in different locations are not always good comparators. Know what the key features are of each location such parking, access to public transport and other critical infrastructure.

A critical factor is understanding how the rent will be calculated.

Rent Review

Typically speaking the rent in a lease will increase each year on and from the anniversary of the lease. Ordinarily rent will be reviewed based on CPI, a fixed percentage or market review. Which method is best is all a matter of perspective and the status of the general economy – much of which cannot be readily predicted at the outset of a longer term lease.

Outgoings

In addition to rent a lessor will ordinarily require a lessee to pay the costs associated with their occupation of the premises. These costs are only recoverable if they are set out in the lease. The Retail Leases Act restricts what outgoings can be recovered from a lessee but otherwise the issue is entirely subject to agreement between the parties. Hence great care and diligence is required to ensure that only fair and reasonable outgoings are included in the lease.

Outgoings are a critical part of the total occupancy costs of a premises – rent is only part of the equation. Outgoings must be factored into the costs associated with the lease.

Availability of Services

Lessors will generally commit to taking certain steps to ensure that services (such as lifts, air conditioning and electricity) are available to the leased premises. However lessees should seek a clause in the lease allowing for a rent abatement provision where important services are inoperative for any extended period. Otherwise, the lessee can find itself liable to pay rent when it may be unable to use the premises or the premises are not in their optimal state yet the full rate of rent is still payable.

Security Deposit or Bank Guarantee

Every lease will require the lessee to provide a security bond. This is an amount of money intended to entice the lessee to comply with their obligations under the lease and to partially secure the lessor against loss for things such as non-payment of rent or damage occasion to the premise etc.

This may take the form of a cash payment to be held by the lessor or their agent or the use of a Bank Guarantee. The amount is entirely negotiable but will usually be reference to a certain number of months of rent and outgoings.

Who is the lessee?

If you chose to enter into a lease using a company or corporate structure a lessor will often require you to give a personal/directors guarantees. The effect of a personal guarantee is that the lessor may recover any rents, damages or other amounts due under the lease from the guarantor(s) personally if the lessee fails to pay them.

Personal guarantees should not be given lightly - ever.

We have years of experience in helping businesses manage their leasing requirements. If you are looking at entering into a lease speak to us before you commit to the premises so we can ensure you understand your obligations under the proposed lease and that the lease will assist you to enhance your business.

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