Welcome to Part 2 of my “Commercial Lease Negotiation Essentials” which looks at some other things that landlords and tenants should consider before signing an Agreement to Lease. Lease terms are important to landlords for a number of reasons including that the value of the property will is directly related to the strength of the lease and the rental income. From a tenant’s perspective the lease is a vital component of their business. A good lease will add to the value of a business. Lawyers can add a lot more value by being involved during lease negotiations.
Other issues that require consideration during negotiations include:
7. Permitted Use
Lessees should negotiate this as wide as possible to provide scope to change the business and also to increases the chances of being able to find a sub-tenant or assignee of the lease should the tenant need to leave before expiry. Tenants in shopping centres and strip shops should also consider the benefit of exclusivity via a clause whereby the landlord agrees to not lease other premises in the centre to anyone with the same or similar permitted use.
8. Obligations at End of Lease
It is normal for the lease to require the tenant to paint and make good at the end of the term. Tenants should avoid clauses which require the premises to be brought back to original (or base/shell) condition. This could involve a substantial costs on top of the cost of moving. Where possible tenant’s should negotiate the option to leave behind fittings and improvements. Make good obligations are extremely important for assignee’s of a lease as the obligations will usually date back to the condition of the premises at the beginning of the lease.
9. First Right of Refusal to Purchase Premises
Landlord’s often don’t care about granting a first right of refusal provided the terms aren’t overly restrictive and particularly where it doesn’t apply if the property is to be sold by auction. A first right of refusal is potentially a significant comfort for many tenants particularly where their ability to purchase ‘down the track’ is likely to be improved. I strongly recommend that all tenants that have found the ‘ideal location’ consider at least asking for a first right of refusal even if it only adds a potential benefit to a purchaser of the tenant’s business.
10. Formal Lease Review / Clauses to Avoid
Leasing agents should provide a copy of their landlord’s lawyer’s standard lease terms as soon as lease negotiations commence. These terms are not standard and are landlord friendly in the extreme. It is vital for tenants to get advice before the sign anything. ‘Standard’ landlord leases often contain clauses such as “charging clauses” whereby a tenant agrees to secure the tenant’s obligations by “charging” (or mortgaging) all of the tenant’s property in favour of the landlord. That property would include bank accounts, motor vehicles, plant and equipment, work-in-progress, stock and real property (a house or investment property).
11. Director Guarantees
From a landlord’s perspective it is vital to obtain as much security as possible for the tenant’s obligations under the lease particularly if the tenant is a new $1 company with no assets. Obviously the converse is true for tenants who should want to avoid director guarantees if at all possible. Some alternatives include:
- Bank guarantee for a number of months rent (3-6 months rent is common);
- Payment of rent in advance (this is also a way for tenant’s to negotiate other concessions particularly if the tenant is able to pay say 12 months or more in advance); or
- Fixed and floating charge or security deed over company assets.
12. Register or Caveat Interest as Lessee
There is no benefit or detriment to the landlord if the tenant registers the lease (or caveats its interest as lessee) but there could be significant benefits of lease registration to the tenant in a situation where the landlord loses the title to the property to a mortgagee (bank) or where the landlord sells or transfers the property. The purchaser of a property is only bound by a registered lease and is legally able to eject a tenant with an unregistered lease. We strongly recommend that all lessees consider the benefit of registering their leases.
For further information please contact Danny on 8362 6400 or email Danny Beger. Join our mailing list to receive updates and advice on current issues.