Introduction

Many tenants believe that commercial leases are a "take it or leave it" proposition.  This is not necessarily so.  Particularly where there are reasonable vacancy rates, or if the tenant is a good proposition offering to rent premises for a substantial period, there can be lot of room for negotiation.

Here is some information to give you a general idea about leases.

Leases – The Basics

Under a lease, the landlord remains the legal owner of the leased land, but agrees to ‘carve out’ most of the rights that come with that ownership and give them to the tenant to use for a period of time.  The lease sets out the terms upon which that is done.  Leases often refer to the landlord as the “lessor” and the tenant as the “lessee”.

As owner, the landlord still keeps significant rights and controls over the lease and the land.  A good lease should properly protect the legitimate rights and interests of the landlord as owner and the tenant as the user of the land.

Basically, a lease gives a tenant a legal right to exclusive use and possession of all or part of an area of land, for an agreed rent and an agreed period or for a period implied by the law.  The tenant can even generally exclude entry by the landlord, except in the case of emergencies or by prior agreement or if the landlord has a right to re-enter the land on termination of the lease.

By was of contrast, a licence to occupy premises does not confer a right to exclusive possession (or to exclude the landlord).

What should a lease cover?

A lease should at least deal with the following things:

• the proper description of the premises
• the duration of the lease should be specified (called the “term” of the lease)
• whether the lease can be renewed and for how long
• the amount of rent and any bond
• how rent is to be reviewed during the term of the lease or on its renewal
• contributions to payment of the landlord’s outgoings (e.g. rates and taxes)
• how the premises may be used – Council or other permission may be required
• who owns and pays for any fit-out and its removal at the end of the lease
• alterations and building work
• access and trading hours
• repairs and insurance
• what security the landlord requires, e.g. personal guarantees if the tenant is a company, bank guarantees
• rights to assign or sublet
• essential terms of the lease
• breach of the lease
• rights to terminate
• what happens on termination

Writing and registration

While the law recognizes some leases even if they are not in writing, writing is generally required and is certainly desirable to give certainty to the terms.  If the leased land is sold before the end of the lease, the tenant will want the new owner to honour the lease.    In NSW, if the lease exceeds three years (including any options to renew the lease), this protection is obtained by registering the lease with Land and Property Information NSW.  Leases for less than 3 years are often not registered, because there is some extra protection under the law for tenants of such leases, but it is still prudent to register them.

Implied terms

In the absence of express terms in the lease, the law implies certain rights into the lease e.g.:

• a tenant's right to quiet enjoyment of the premises (i.e. the landlord may not disrupt the tenant's use of the premises)
• a term that the landlord may not do anything inconsistent with the purposes for which the premises are leased
• the law also implies certain obligations on the tenant e.g. to use the premises in a “tenant-like manner” (e.g. not damage the premises), and deliver possession to the landlord at the end of the tenancy
• an obligation on tenants to pay rent (rent is to abate if the premises become unfit for occupation through damage by fire, flood, lightening, storm or tempest; if part of the premises are damaged rent is to abate proportionately)
• an obligation to repair (the obligation depends on the condition of the premises at the start of the lease; in any case a tenant is not liable for fair wear and tear)
• rights of entry to view the state of repair and rights to re-enter and terminate the lease for failure to pay rent or for breach of some other covenant in the lease. 

There is some argument as to whether these implied terms apply to all leases, but most commercial leases we have dealt with contain explicit clauses dealing with these topics.

Assignments and Sub-Leases

An assignment transfers the whole of the tenant’s interest in the lease.  A sub-lease transfers part of the tenant’s interest in the lease, (e.g. part of the premises for part of the remaining term). 

An assignment or sublease of the premises is only permitted in accordance with the terms of the lease. Most leases contain terms restricting the right to sub-lease or assign.  The lease will usually provide that a landlord cannot refuse to consent unreasonably and sets out the things the landlord is entitled to consider in refusing that consent.

It is important from a tenant’s perspective that the lease permits assignment to guard against downturns in business.

Retail Leases

The law makes specific provisions for retail leases.  For an article on retail leases click here. 

The Big Haggle – Negotiating Terms of the Lease

For a case study illustrating some of the terms which can be negotiated, click here.

How your lawyer can help

Your lawyer can help by:

• drafting a lease which protects your rights as a landlord or tenant
•   when acting for a tenant, negotiating the terms of the lease to protect the rights and interests of the tenant
• acting reasonably in a negotiation so as to facilitate the deal the parties have shaken hands on
• ensuring the lease documentation contains all the agreed terms
• enforcing the terms of the lease while it is on foot, including advising landlords and tenants on their rights under the lease such as rights under rent review or exercise of option provisions
• advising landlords on their remedies upon breach e.g. to recover possession, to recover unpaid rent, to recover for damage to premises etc
• advising tenants on their rights e.g. to a reduction in rent when the premises are damaged (by someone other than the tenant); rights to release of Bank Guarantees or personal guarantees
• advising tenants on their rights if they are being pursued by a landlord after termination of a lease.

For expert advice on all leasing matters, contact our senior solicitor, Nick Houen. 

The information contained in this article was current as at  23 November 2007