Leasing business premises is a significant financial commitment for businesses. Businesses premises leases are usually lengthy legal documents that need to be properly negotiated and understood.
This article is written for business owners that are seeking to better understand businesses leases. Our commercial lease lawyer explains:
- the types of leases that a business may enter into
- key terms and conditions you can expect to read
- the importance of negotiating terms that are fair to your business
Our commercial lease lawyer recommends seeking professional advice before you sign a lease for business premises. Commercial leases involve a significant financial commitment. For this reason, it is important that you invest in advice from a qualified Australian commercial lease lawyer.
Key Takeaways
- Understand the different types of businesses leases.
- Know your rights and obligations as a tenant under Australian law.
- Be aware of the key terms and conditions that should be included in a lease agreement.
- Recognise the importance of negotiating lease terms to suit your business needs.
- Learn the steps to take if disputes arise during the lease period.
- Seek legal advice before signing the lease and for any ongoing legal issues.
The Different Types of Business Leases
In Australia, business leases can vary significantly depending on the property type and the landlord’s preferences. There are also different laws that apply to certain types of leases.
Retail leases often provide additional protections to tenants. These additional protections include minimum lease terms and the right to compensation for disturbance during the lease period.
The main types of commercial leases include Retail Shop Leases and non-retail leases.
Retail Leases
Retail leases are governed by State and Territory retail tenancy legislation. These leases apply to premises used for retail businesses. A retail shop lease is broadly defined as:
- a lease for premises that is used at least mostly for the purpose of the retail sale or hire of goods or services
- the premises may be located in a shopping centre or a standalone premises
Cases considering what is and isn’t considered a retail shop lease
Premises used for warehousing and distribution purposes
In BB Australia Pty Ltd v Barry Stewart Pty Ltd, the Court found that the lease did not constitute a retail shop lease. This was because the premises were not used for retail purposes, as there was no direct sale or hire of goods to the public.
Eastmark Holdings Pty Ltd v Kabraji
A business providing financial services to the public fell within the definition of a retail shop lease. The premises were used for retail purposes because the services were offered directly to the public.
Macedonian Cultural Centre Ilinden Inc v Mackie
The premises did not qualify as a retail shop lease under the Victorian Retail Leases Act 2003. This was because the activities carried out by the business were not commercial in nature. Further, the premises were not used for the sale or hire of goods or retail provision of services.
Southgate Management Pty Ltd v Katotakis
The Court found that a nightclub was not a retail shop. This was because the primary purpose was entertainment, not the sale of goods or retail provision of services.
Office Leases
Office leases are for premises used primarily as office space. Some office leases may be covered by the various Retail Shop Leases Acts if they meet the definition of a retail shop lease. However, many office premises will not meet this definition and will therefore be governed by Common Law.
Office leases are not (other than the relevant Property Law Acts) governed by specific legislation applying to office leases. Because of this, there is more scope for terms that are unfair to tenants. Laws that prohibit unfair contract terms can apply to certain office leases.
Leases for Industrial Business Premises
Used for warehouses, factories, and other industrial properties. These leases often have specific requirements related to the use of the property. They may include provisions for environmental compliance and maintenance responsibilities.
Key Terms and Conditions in a Business Lease Agreement
When entering into a lease for business premises, it is important to pay attention to the key terms and conditions we have explained below.
Lease Term
The term of the lease refers to the period of time between the start of the lease and the end of the lease, including any renewal options.
It’s important to pay attention to:
- the conditions on which the option to renew can be exercised
- whether the lease can be terminated early by the lessor
- whether the lease can be terminated by the tenant if something happens that means the premises cannot be occupied or used for the purpose that it was leased for
Business owners must take care to ensure the lease term aligns with the plans of the business. Changes to the location of the premises can cause significant business disruption.
Rent and Rent Reviews
The amount of rent and when rental payment can be increased (and by how much) are a key part of a business premises lease.
If a business tenant has agreed to a rent-free period, this must be accurately recorded in the lease. Further, rent reviews can be based on:
- fixed increases
- adjustment for CPI (Consumer Price Index)
- market rate rent reviews
Business owners must understand and calculate how much their rent will increase by. This rental increase should be factored into any budgets and business planning.
Outgoings
Rental outgoings are additional costs the tenant may be responsible for, such as council rates, insurance, and maintenance.
Often, these are paid directly by the lessor and then shared between the tenants. Outgoings may be a fixed amount, but will often be an estimate. Business owners should take care to understand what types of outgoings they are responsible for and whether they have a right to audit records of outgoings.
Fit-Out and Alterations
Fit out and other building works may be carried out prior to or during the lease term. Fit out works can be common and may depend on the intended use of the premises.
Business owners must understand clauses in the lease relating to:
- fit-out of the premises
- the extent to which alterations can be made
- who is responsible for the fit-out costs
- whether any building costs are recoverable against the tenant
- who is responsible for hiring the building contractor to carry out the fit out
Assignment and Subletting
Business owners may want to assign (transfer) the lease to someone else before the lease ends.
The business premises lease will often describe the conditions under which the tenant can assign the lease. Understandably, lessors want to know that any proposed replacement tenant is capable complying with the lease and minimise any costs or disruption for the lessor.
It is important for business owners to seek the written consent of the lessor before any assignment of the lease.
Another key provision relates to subletting the premises to someone else. Any sublease should be recorded in writing, along with the consent of the lessor.
Rights to Terminate the Business Lease
Termination clauses can be overlooked by business owners because they have no intention of ending the lease early at the time they sign the business lease. However, termination rights are important because:
- the business may not be able to earn revenue or operate if the premises are no longer available
- it is unfair for business owners to have to continue to pay rent if the premises cannot be used (other than because of the fault of the tenant)
- if a lessor can end a business premises lease early, with no penalty, this may negatively impact the business of the tenant
Termination clauses in business premises leases should be reviewed by a qualified commercial lease lawyer. They will be able to explain a tenant’s rights and negotiate any clauses that appear unfair.
Make Good Obligations
We discuss make good obligations in commercial leases in this article.
Negotiating the Lease
Negotiating a commercial lease can be complex. There may be a delay to the start of the business lease if negotiations are not done early and properly. Here are some tips to help business owners negotiate favourable terms:
- understand the current market conditions and comparable lease rates in the area
- engage a commercial lease lawyer who understands commercial leases to review the terms and ensure your interests are protected
- lessors may offer incentives such as rent-free periods or contributions to fit-out costs. Ensure these are clearly documented in the lease
- where possible, negotiate terms that allow for flexibility, such as shorter lease terms with options to renew or break clauses
Resolving Lease Disputes
Disputes between lessors and business tenants can arise for various reasons. There may be disagreements over rent reviews, maintenance responsibilities, or breaches of the business premises lease agreement. In Australia, there are several mechanisms for resolving lease disputes:
- mediation, whereby an independent mediator helps the parties reach a mutually acceptable resolution
- each State and Territory have tribunals that handle disputes related to commercial leases, such as the Victorian Civil and Administrative Tribunal (VCAT) or the NSW Civil and Administrative Tribunal (NCAT).
- for more complex or high-value disputes, court proceedings may be necessary.
Case Law Relating to Business Premises Leases
Ross-Hunt Pty Ltd v Cianjan Pty Ltd
- The Supreme Court of Victoria dealt with allegations of misleading and deceptive conduct by a landlord during lease negotiations.
- Ross-Hunt, the tenant, claimed that certain terms in the lease were unfair.
- Ross-Hunt sought relief under the ACL, which extends the unfair contract terms provisions to standard form small business contracts.
- The court found that the commercial lease was a standard form contract. This was because it was prepared by one party (the landlord) with little to no opportunity for negotiation by the other party (the tenant).
- The court emphasised the importance of full disclosure and honesty in pre-contractual representations.
Primary RE Limited v Great Southern Property Holdings Limited (Receivers and Managers Appointed) (in liquidation)
- This case addressed the issue of whether a lease was valid and enforceable even though there were procedural problems.
- The lease was not executed in strict compliance with the formal requirements typically required for such agreements
- The Victorian Court of Appeal upheld the lease’s validity.
- They looked at the intention of the parties and the conduct indicating acceptance of the lease terms.
Crown Melbourne Limited v Cosmopolitan Hotel (Vic) Pty Ltd
- This case involved a dispute over the renewal of a commercial lease and the application of estoppel principles.
- Cosmopolitan Hotel operated two restaurants in the Crown Casino complex under leases that expired in 2012.
- Before the expiration of the leases, Crown Melbourne’s representative told Cosmopolitan Hotel that they would be “looked after at renewal time.”
- Cosmopolitan Hotel interpreted this statement as an assurance that they would be granted further five-year leases.
- The High Court found that the tenant could not rely on informal representations to enforce a lease renewal, emphasising the need for formal agreements.
Frequently Asked Questions
What is a retail lease?
A retail lease is a type of commercial lease specifically for premises used for retail purposes. These leases are governed by State and Territory retail tenancy legislation and provide additional protections to tenants.
How often can my rent be increased?
Rent increases are typically outlined in the lease agreement and can occur based on fixed increases, CPI adjustments, or market reviews. It’s important to understand the basis for rent reviews before signing the lease.
Can I make alterations to the leased premises?
Most lease agreements will have specific provisions regarding alterations. Generally, tenants can make alterations with the landlord’s consent, but it’s crucial to have these provisions clearly outlined in the lease.
What happens if I want to terminate the lease early?
Terminating a lease early can be challenging and often involves negotiating with the landlord. Some leases include break clauses that allow early termination under specific conditions. Legal advice should be sought in such situations.