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Obligations of Tenants and Landlords under a Commercial Lease

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Last revision: 24th May 2019
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Category: Commercial Property
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A commercial lease is a common document in Australia, and is used to outline the relationship between a landlord and tenant, when a tenant is renting a commercial property.

Importantly, a commercial lease is different from a retail lease, although both are used in relation to commercial properties in Australia. The differences between these documents are discussed below. While there are many similarities between commercial leases and retail leases, this guide will focus on commercial leases.

In basic terms, when a landlord and a tenant sign a commercial lease, the landlord agrees to provide the tenant with use of the property, and the tenant agrees to pay rent. In connection with this, many other matters need to be addressed, such as maintenance of the property, insurance, and ongoing costs such as rates and land tax. A good commercial lease document can deal with all of this.

For the purposes of this guide, the term "landlord" will refer to the person or entity that owns a commercial property and rents it out. The term "tenant" will refer to the person or organisation that rents the property from the landlord.


Tenant obligations

A tenant must comply with all of its obligations under a commercial lease, or will risk having the lease terminated. Therefore it is important that the tenant fully understands their obligations under the lease, and is careful to fulfill those obligations.


1. Paying rent

The first and most obvious obligation of the tenant, is to pay rent. This means paying rent in the form required by the landlord (by cheque, cash, electronic funds transfer etc), and paying it on time. If it takes time for rent to be processed (for example, for an electronic funds transfer to make it from the tenant's account to the landlord's account), then the tenant will need to account for this, so that the landlord actually receives the rent on or before the day it is due. To be safe, many tenants set up automatic payments, and schedule several days or even weeks in advance.

The amount of rent and manner of payment will be set out in the lease. The lease will also explain whether rent may be increased at any point (often referred to as a "rent review").

Many commercial leases will allow rent to be increased during the term of the lease. This may involve increases in line with the Consumer Price Index (CPI), fixed percentage increases, or "market" increases. Market increases involve the landlord and tenant agreeing on a new rate of rent, and if they cannot agree, then a valuer determines the appropriate rate of rent.

In many leases, there will be a CPI increase or a fixed percentage increase every 12 months, and a market increase if and when the tenant exercises an option to renew the lease.


2. Paying the security deposit

This is often referred to as a "bond" and is usually required by the landlord before the tenant first moves into the property.

The bond is held by the landlord, to provide some security against a default by the tenant. For example, if the tenant fails to pay rent when it is due, or damages the property, the landlord may draw on the bond to cover those costs.

The total amount of the bond, and the details of how and when it must be provided, will be set out in the lease.

Bonds often amount to the equivalent of three to six months' rent. A bond might be required in cash, or in the form of a bank guarantee. If it is provided in cash, the lease should explain where it must be held. The lease should also set out the conditions on which it may be used or returned.


3. Maintenance

There are many different types of maintenance that a property may require, and the lease should make it clear who is responsible for what.

In many commercial leases, the tenant is responsible for general upkeep, in order to keep the property in a similar condition to how it was at the start of the lease (except for fair wear and tear). This might involve repairing a leaking tap or cracked tile, cleaning the carpets, and other similar matters. However, it is common for the landlord to be responsible for larger structural issues, such as a sagging foundation or a leaking roof.

In any case, the lease should make it clear who is responsible for what, and the tenant must ensure that they deal with all of their maintenance obligations as set out in the lease.


4. Insurance

Often, the tenant is required to obtain insurance in relation to the property.

For example, the tenant might be required to insure the building against damage or destruction (such as by fire). The tenant might also be required to obtain public liability insurance, to protect against loss if a person is injured or dies as a result of some defect at the property.

In many cases, the lease also requires the tenant to name the landlord as an "interested party" under the insurance policy.

The necessary insurance policies will be explained in the lease. These might be different from any insurance policies which the tenant requires for their business. For example, if the tenant has business vehicles or business equipment, it might be necessary to obtain separate insurance policies in relation to them. In some cases the tenant might also require liability insurance in relation to their particular industry.

Many tenants find it helpful to speak to a lawyer and/or an insurance broker about any relevant insurance policies.


5. Paying for outgoings

Outgoings for the property may include such things as rates, land tax, body corporate fees, electricity, water, telephone and internet.

The lease should make it clear who pays which outgoings. In many commercial leases, the tenant pays all of the outgoings.


6. Paying for legal costs

In many commercial leases, the tenant may have to pay the landlord's reasonable legal costs (in relation to the negotiation and preparation of the lease) in addition to the tenant's own legal costs. The lease will clarify whether this is the case.


Landlord obligations

A landlord must comply with all of its obligations under the lease, or will risk the tenant terminating the lease and leaving the landlord with a vacant property. If the landlord's action causes a loss to the tenant (for example, by harming the tenant's business), then the tenant may also take legal action against the landlord to recover those losses.


1. Providing the tenant with use of the property

The first and most obvious obligation of the landlord, is to provide the tenant with the full and uninterrupted ability to use the property in the way that the lease says the tenant will be able to use it.

For example, this means that the property needs to be vacant on the first date that the tenant is taking it over, and the landlord needs to avoid interfering with the tenant's use of the property throughout the term. Usually, if the landlord needs to access the property (for example to conduct an inspection, or to conduct repairs), the lease will say how this should be managed, and may require the landlord to give the tenant a certain amount of notice.

If the property has been advertised as fit for a particular purpose, then the landlord may need to make sure that it is actually fit for that purpose. For example, if certain features are essential for the specific purpose (such as industrial ventilation or plumbing), then the landlord may need to ensure that those features are provided with the property.


2. Maintenance

As discussed above, there are many different types of maintenance that a property may require, and the lease should make it clear who is responsible for what.

While the tenant may be responsible for general upkeep, such as repairing a leaking tap or a cracked tile or cleaning the carpets, it is common for the landlord to be responsible for larger structural issues, such as a sagging foundation or a leaking roof.

In any event the lease will clarify exactly what each party is responsible for. The landlord should make sure to keep up with any maintenance obligations. In many cases, a failure to do this can cause the tenant's business to suffer, which may lead to the tenant terminating the lease and/or taking legal action against the landlord for any losses. For example, it is easy to imagine how a leaking roof might drive customers away from a restaurant business.


3. Payment of rates, land tax, body corporate fees and other outgoings

The lease should identify who is responsible for paying the various outgoings in relation to the property.

As discussed above, many (or even all) of the outgoings may be paid by the tenant. These may include such things as rates, land tax, body corporate fees, electricity, water, telephone and internet.

However, in many cases, some or all of the outgoings might be made out to the landlord, meaning that the landlord is responsible for processing the payment of the outgoings, and then the tenant is required to reimburse the landlord. This is common particularly in the case of rates, land tax and body corporate fees.


4. Insurance

As discussed above, the lease should also identify any insurance policies which the parties are required to obtain.

In some cases the landlord is responsible for insuring the building, while the tenant is responsible for insuring what is inside it (such as the plant and equipment). The tenant may also be required to obtain public liability insurance. In any event, the landlord will need to make sure to comply with any requirements under the lease in relation to insurance.

In addition, it is in the landlord's interest to make sure that there are adequate protections in place in relation to risks such as fire, damage, and public liability. Therefore, the landlord should be proactive about this and should not assume that the tenant has it organised.

In many cases, if the tenant is responsible for obtaining the relevant insurance, the landlord requests evidence from the tenant to show that the adequate coverage is in place (such as a certificate of insurance and a copy of the relevant policy). In many cases, the landlord also requests that the landlord be named as an "interested party" under the relevant insurance policies.

If the landlord has any concerns about this they should speak to a lawyer and/or an insurance broker.


5. Compliance with laws, regulations and body corporate rules

Depending on the nature of the property and where it is located, there are various laws, regulations and rules which may apply to it. As the owner of the property, it may be the landlord's responsibility to ensure that these are complied with.

For example, planning laws and regulations often specify how the property may be used, and may prevent, for example, a factory or a restaurant being operated in a residential area. Body corporate rules might also specify how properties within a complex may be used.

If the relevant laws, regulations or rules prohibit the property from being used in a certain way (for example, if they prohibit it from being used in heavy industry), then the landlord may need to be cautious of this. A landlord may face legal action if they advertise the property for use in a particular way which is contrary to the relevant laws, regulations or rules.


Commercial lease v retail lease

Each state and territory in Australia has specific legislation which says that some types of commercial property can only be rented through a "retail lease" (rather than a general commercial lease). The law also imposes more restrictions on retail leases than it does for commercial leases.

The exact requirements for retail leases vary from one state or territory to the other, but it is often a question of the size of the property being leased and/or what it is going to be used for. In general, retail shops and similar businesses are likely to be affected by "retail leases". Other commercial property such as scrap yards or warehouses may not be affected.

Landlords who have property that fits within this retail tenancy legislation must only rent the property out using a retail lease. They are likely to face penalties if they fail to do this.

Therefore, it is important to determine whether or not the property being rented is going to be affected by the retail tenancy legislation in the relevant state or territory. Each state and territory government has an office or department that deals with fair trading or small business matters (such as the "Small Business Commissioner" or the office of "Consumer Affairs and Fair Trading"). This is usually a good place to go for information about retail leases in the relevant state or territory.


In conclusion

As with many legal documents, commercial leases can vary a lot from one situation to the next. Therefore, it is important that all parties read the lease carefully, and make sure they understand all of the relevant terms. This guide has discussed the general obligations that may apply to tenants and landlords, but the lease will identify the actual obligations of each party.

If the parties have any doubts or concerns about the lease or about their obligations under it, then they should seek legal advice.


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