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Leasing a commercial property can be daunting, and as a landlord, there are several considerations to make. You need to consider various aspects that will affect you and your tenant to ensure they are satisfied and happy with the lease. This article will outline six critical tips for when you lease your commercial property.

Ensuring the Lease Agreement Has All Necessary Clauses

The last thing you want is for the agreement to have missed an essential scenario that you may need to refer back to in the future. The Property Law Act governs a commercial lease agreement. Additionally, it can include various clauses you have agreed upon with your tenant. The contract should include details such as:

  • the parties involved;
  • a description of the premises;
  • the term of the lease;
  • rent review;
  • tenant maintenance requirements;
  • the ownership of fixtures and fittings;
  • what happens if the building is damaged;
  • outgoings and who is responsible for paying these;
  • parking rights; and
  • tenant use clauses.

Considering the Length of Lease Terms

Usually, the term of a standard commercial lease agreement will range from three to five years, with an option of one period of renewal or possibly two, depending on the lease negotiations. A longterm lease will give your business a sense of security as you have bound the tenant for a longer time. This means you will have a steady income from rent for some years, and there is a lower risk of vacancy.  However, in a fast-growing market, often rent in a longterm lease may not ‘catch up’ with the market rent until renewal (when market reviews normally take place).  

Therefore, tenants usually prefer short-term leases as they are lower risk, especially when accompanied by options for renewal. With a shorter lease, you can change the lease terms to better suit your market.

Before you make an offer to lease, it is vital that you consider the term you are willing to offer and whether you are also willing to offer options for renewal.

Security Expected From Tenants

As a landlord, you may want security for the lease beyond merely a promise to pay from a company tenant (which may not have any significant assets backing its promise to pay over the long term). Tenants usually provide additional security through a bank bond or personal guarantee.

Bank Bond

Bank bonds or bank guarantees are a financial agreement between a tenant and their bank where a bank will pay a specified sum to you if the tenant cannot pay. Note, the bank must release it immediately on your instruction. Normally, the amount to be set aside for a bank guarantee ranges from three to six months’ rent, plus outgoings. It is strongly recommended that a larger bank guarantee be required (such as six months’ rent) if no personal guarantee is secured.

Personal Guarantee

A personal guarantee is where a director (or directors) of the tenant company agree to personally pay for any debts they incur, such as debt from failing to pay rent or utilities. You may want to consider asking for more security if the lease agreement carries a high risk. Usually, tenants leasing for the first time or having a weak leasing history will indicate an increased risk. 

Security can help ensure that you do not take responsibility for any of the tenant’s debts and that your interests in the property are protected. However, having a clause requiring security from a tenant may put off prospective tenants who do not want to provide security. Therefore, while it may protect you, it may be harder to find tenants depending on your requirements.

Rent Review

Generally speaking, rent increases in fixed increments over the term of a commercial lease. Or, it may increase in line with the Consumer Price Index (CPI) or some other index. As discussed above, you are likely to require a market review on renewal. Further, you may want to change the rent according to the market value when the lease renews or even at some point during the term if the lease is for a long period of time. Therefore, it is essential to include a clause that enables you to perform such actions. You should also specify the method or formula to assess the rent. Methods include:

  • market rent review, which compares rent for your property with rent for similar properties;
  • CPI rent review, where rent can change according to changes in CPI which is a measure of inflation, and;
  • fixed percentage increase rent review, where rent will increase at percentages outlined in the lease on specified rent review dates.

Fit-Out Contributions

In a difficult leasing environment, some landlords are willing to consider offering fit-out contributions. A fit-out contribution is where landlords contribute to the upfront costs of the fit-out to encourage tenants to sign the lease. This is preferable to a discount on the rent, given the value of the property is often calculated as a multiple of the rent paid.  

Suppose you are considering offering a fit-out contribution. In that case, you must make it clear that the tenant must pay back the fit-out contribution if the lease ends early or is assigned. This is because you are likely to recoup your investment only if the tenant stays for the full term. Standard commercial leases should have the option to include a fit-out contribution. They should also deal with circumstances where the tenant leaves early. 

Identify Responsibilities and Obligations

In a commercial property lease, it is essential to outline the tenant obligations and your obligations. You do not want to go back and forth with your tenant, organising who will pay for what repairs. Further, you need to ensure that the lease is clear on:

  • what happens if the property is damaged; and
  • who will be responsible for these damages.

Examples where confusion can arise include air conditioning or exhaust venting, where it is difficult to know what is a capital replacement or maintenance repair issue. Generally, the landlord will be responsible for the basic infrastructure, but the tenant should be responsible for: 

  • servicing; 
  • repair; and 
  • maintenance.   

Such clauses will help protect you if the tenant has damaged the property, as it may be unfair if you have to bear those costs.

Example: If the tenant has caused the window to break, then you may want them to cover the cost for this. However, if the damage has been caused by a disaster such as an earthquake, then perhaps you will be responsible, as you cannot blame such damages on the tenant.

Make Good Clause

You can also include a make good clause, which means the tenant must return the property to its condition at the beginning of the lease. Including this clause is beneficial, as the tenant will need to repair any damage done to the property and undo any renovations they did. This is helpful, especially if the tenant has made a significant change such as painting the walls a different colour. If you have a make good clause, you do not have to invest money in returning them to their original colour and condition.

The easiest way to identify who needs to pay for what damage is to have a premises condition report. This report will take photos and notes of the property before the tenant moves in to identify the tenant’s liability. 

Reviewing the Contract

A commercial lease agreement is a legally binding agreement between you and the tenant. You should have the documents reviewed by a lawyer who specialises in real estate law and leasing. By checking the contract, you can amend and negotiate aspects that you may not have considered earlier. Doing so will ensure that the lease has clauses for all relevant situations and best protects your interests.

Key Takeaways

When leasing your commercial property, it is crucial to consider many aspects and include important clauses in the lease agreement. You should ensure that your contract has all the necessary provisions while considering the length of the lease term and if you want security from the tenant. You will also need to consider methods of reviewing the rent and what damages your tenant can be liable for. Finally, before signing the lease and making it legally binding, you need to have the contract reviewed by a lawyer to ensure that your interests are best protected. 

If you need help understanding what to consider when leasing your property, our experienced leasing lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers who can answer your questions and draft and review your documents for a low monthly fee. Call us today at 0800 005 570 or visit our membership page

Frequently Asked Questions

How can my tenant provide security to me?

Your tenant can provide security through a bank bond or a personal guarantee. Personal guarantees are the tenant’s personal assets, such as their house or cars.

Do I have to pay for damages my tenant has caused to the property?

If you include a clause in your lease agreement stating that the tenant will be responsible for any damage they have incurred, then no, you will not have to pay. However, if you do not outline responsibility for such damages in the lease agreement, you will be in a challenging position trying to convince your tenant to pay. 

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