Commercial Lease Agreement (Non-Retail)

What is a Commercial Lease Agreement?

A Commercial Lease Agreement is used when a commercial property is being rented from a landlord (or lessor) to a tenant (or lessee). This lease is used when the purpose of renting out a property is for a commercial activity. For instance, it can be a storage area, a warehouse, a factory etc, related to a business.

This lease will create a legally binding contract between the parties, outlining the rights and responsibilities of both the landlord and the tenant.

A Commercial Lease is different from a Residential Lease or a Retail Lease (explained further below).

What are the different types of Lease Agreements?

There are a variety of different lease agreements used in Australia, including:

• Residential Lease - To rent out a property for someone to live in.
• Retail Lease - A specific type of Commercial Lease that is more tightly regulated than a normal Commercial Lease. In general, retail businesses (which sell products or services directly to consumers), such as cafes, restaurants, clothing shops, or hairdressers, need to use a Retail Lease.
• Commercial Lease - These are less tightly regulated than Retail Leases, and may be used for other kinds of commercial property such as scrap yards, warehouses or factories.
• Sublease - When an existing tenant leases part or all of the premises to another tenant. For example, this might be used if a residential tenant moves out for 3 months, and finds someone to take their place temporarily. Subleases need to be approved by the landlord and must comply with the original lease.
• Assignment of Lease - When an existing tenant transfers the lease to a new tenant, so the new tenant takes over and the old tenant exits entirely. However, in most cases, the old tenant still remains liable if the new tenant defaults on the lease. Assignments of lease usually require landlord approval as well.

What is the difference between a Commercial Lease Agreement and a Retail Lease Agreement?

A Retail Lease is more tightly regulated than a Commercial Lease. Each state and territory in Australia has specific legislation regarding Retail Leases. 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.

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 need to use a Retail Lease. Other commercial property such as scrap yards or warehouses may be able to use a general Commercial Lease Agreement.

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 and to determine whether a Commercial Lease is suitable for the relevant property.

Is it mandatory to have a Commercial Lease Agreement?

No, but it is highly advisable to have one. Having a written Commercial Lease Agreement helps protect the interests of both the landlord and the tenant. It also helps ensure that both parties understand the terms, and are able to enforce their rights.

What are the prerequisites of a Commercial Lease Agreement?

First, the parties should check whether the property is suitable for a Commercial Lease, or whether it should be rented through a Retail Lease. If in doubt, seek legal advice.

Before signing a Commercial Lease Agreement the parties should make sure that they understand their rights and obligations. The parties must mutually agree on the terms of the lease. The parties and the relevant property must also be clearly identified. If the property has previously been rented to another tenant, it is also important to make sure that the previous lease has ended.

Who is involved in a Commercial Lease Agreement?

There are a number of parties involved in a Commercial Lease Agreement, including:

• The landlord(s) (sometimes referred to as the owner or lessor): This is the party that will rent out the property and receive rent.
• The tenant(s) (sometimes referred to as the lessee): This is the party that is going to pay rent and occupy the property.
• The guarantor(s): This is someone who agrees to be responsible for the tenant's obligations under the lease, if the tenant fails to comply. A guarantor does not appear in all Commercial Leases.
• The property manager: Sometimes the landlord will hire a property manager to handle the lease and the property on their behalf.

Any of these parties can be an individual person or a company. In addition, in the case of the landlord(s), tenant(s) and guarantor(s), there may be just one of them, or there may be two or more of them. For example, if two people own a property together, they would both be the landlords.

Can the landlord limit the type of activity that will be developed in the property?

Yes. This is usually done through a "permitted use" clause in the lease. The tenant is usually not allowed to use the property for any other purposes, without the landlord's consent. If the tenant does so, then it would be a breach of the lease.

What can be the duration of a Commercial Lease Agreement?

The parties are generally free to negotiate to have whatever duration they like for their Commercial Lease Agreement. However, for long term leases (usually over 5 years, or over 10 years) the parties may need to pay close attention to laws relating to subdivisions in the relevant state or territory. This may be found in conveyancing legislation or in planning legislation. In some cases, leases over a certain length of time are deemed to be subdivisions, according to that legislation.

As a result, the parties may be found to have subdivided land without the appropriate planning approvals. This can lead to prosecution and fines. In addition, a court may refuse to uphold such a lease, meaning that the tenant may be released from the obligation to pay rent.

What does "guarantor" mean?

A guarantor under a Commercial Lease is someone who agrees to be responsible for the tenant's obligations under the lease, if the tenant fails to comply.

For example, a guarantor is often used if the tenant is a company. The landlord may want to make sure that if the company collapses, there is still an actual person (the guarantor) available who can be made responsible for all outstanding rent and other payment obligations. So in these circumstances, the tenant might be a company and the guarantor might be a director of that company.

What is a security deposit?

A security deposit (also known as a bond) is a sum of money often paid by the tenant to the landlord at the start of the lease. If the tenant damages the property in breach of the lease, then the landlord can use the security deposit to pay for repairs. Alternatively, if the tenant stops paying rent (in violation of the lease) then the landlord may be able to use the security deposit to cover the unpaid rent.

A security deposit is not mandatory, but is very common. It is usually equal to 1-3 months rent, although the actual amount can be negotiated between the parties. It is usually paid before the start of the lease, before the tenant gets access to the property. The landlord (or their agent) usually holds the security deposit in a separate account, and if there are no problems, then they return it to the tenant at the end of the lease.

What does "option to renew" mean?

If an option to renew is included in a Commercial Lease, this means that when the initial term of the lease expires, the tenant will have the option to renew the lease for a predefined term.

If the tenant is not in breach of the lease, and follows the necessary steps (which are usually explained in the lease itself - such as providing adequate written notice to the landlord) then the lease will automatically be renewed (the landlord cannot avoid it).

What has to be done once the Agreement is ready?

Once the Commercial Lease Agreement is ready, the following things should be done:

• Any relevant attachments should be prepared and attached (such as a certificate of title or other relevant property information).
• Both landlord and tenant should consider whether they need to obtain insurance, and if so they should organise it.
• The tenant should inspect the property and bring any maintenance issues to the attention of the landlord, in writing, before the tenant has moved in.
• All parties should review the lease to make sure they understand the terms and are happy with them.
• All parties should sign it.
• The parties should all keep a fully signed copy of the lease for their own records.
• The tenant should make sure that they have correct bank account details for the landlord.
• If a security deposit or bond is payable under the lease, the tenant should arrange for payment of it.
• The tenant should arrange for payment of rent when it is due.
• The landlord should provide keys and any other items (such as codes for security systems) to the tenant.
• The tenant should ensure that relevant utilities (such as electricity and internet) are connected.

Which documents should be attached to the Agreement?

There are no documents that must be attached to all Commercial Lease Agreements. However, there are a number of documents that are often attached and are worth considering:

• Documents that identify the property, such as a certificate of title and floor plan.
• If there are body corporate rules for the property, a copy of those rules.
• If there is a list of plant and equipment to be included with the property (such as fridges, freezers, furniture etc) then a full list of the plant and equipment that is to be included.
• If the parties are preparing a condition report for the property, then a copy of the condition report. This is like a checklist that the parties can use to confirm what condition the property is in at the commencement of the lease and to identify any pre-existing maintenance issues (so that the tenant is not blamed for them).
• Any other documents that the parties think are relevant.

Is it necessary to have witnesses for a Commercial Lease Agreement?

No, witnesses are not mandatory for a Commercial Lease Agreement, but they are useful for evidentiary purposes. If there is ever a dispute over the Commercial Lease Agreement, witnesses can help to prove that each party's signature is valid.

Witnesses should be independent adults (aged over 18), who have the mental capacity to understand what they are doing. They should not be related to one of the parties.

What must a Commercial Lease Agreement contain?

The following details need to be included in a Commercial Lease Agreement:

• Names of the parties: the full legal names of all parties including the landlord(s), the tenant(s) and any guarantor(s).
• Description of the property: this includes the address and any specific areas included (such as parking spaces or communal areas).
• Lease term: the start and end date for the lease as well as any options to renew (if applicable).
• Rent: the amount of rent the tenant must pay, when it must be paid, and how it must be paid.
• Rent increases: any methods of calculating rent increases during the term of the lease.
• Security deposit: also referred to as the bond - including the amount of the security deposit, where it will be held, and the circumstances in which it will be returned to the tenant or retained by the landlord.
• Permitted use: details about how the property may be used by the tenant, and what restrictions there are (such as restricted trading hours).
• Maintenance and repairs: details of who is responsible for different kinds of repairs.
• Insurance: details of any insurance policies that need to be purchased (such as building insurance, contents insurance, liability insurance etc), and who is responsible for purchasing each policy.
• Utilities: details of any utilities at the property such as electricity, internet or water, and who is responsible for paying for each of them.
• Termination: details of how and when the lease may be terminated by either party.

Which laws are applicable to a Commercial Lease Agreement?

The various retail tenancy legislation in each state and territory affects some Commercial Leases.

A Commercial Lease is a contract between the landlord and the tenant, and as such, general principles of contract law, as provided by the common law, will apply.

For long term leases, legislation dealing with subdivisions in the applicable state or territory may be relevant. Laws dealing with subdivisions are often contained in conveyancing legislation or planning and land use legislation.

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