April 2019 | Scott Freidman
A lease is a legal document that governs the relationship between a landlord and a tenant for the occupation of premises.
Leases are important commitments for both landlords and tenants because of the substantial cost of rent and outgoings, the duration of the lease term and the risk of financial penalties if a party breaches their obligations under the lease.
Too often we deal with situations where parties default under a lease because they were unaware of the full extent of their obligations when they entered into it. On the other hand, we advise parties who quite unintentionally do not reap the full benefit of their rights under a lease.
A lawyer will ensure that you understand the full extent of your rights and obligations under the lease as well as that of the other party. We can highlight standard clauses from non-standard clauses and help you negotiate more favourable terms (or at least limit the application of unfavourable terms).
It is best to involve a lawyer at the negotiation stage before any terms become binding. Your lawyer doesn’t have to be involved in the negotiating process – this can be between you and the other party (or their agent). However, you should strongly consider having a lawyer review the ‘heads of agreement’ prior to signing it. Once signed, these terms are binding and it can be very difficult for your lawyer to seek to have any of these provisions amended or removed from the lease.
What are some of the main clauses we review in a lease?
Every lease is different. However, some of the common clauses we pay particular attention to are as follows:
Rent review – there are three common methods of rent review: a fixed percentage annual increase, an increase in accordance with the consumer price index, or a market review. What we typically see, for example, is a lease for a term of 3 years (initial term) with an option to renew for a further 3 years. During the initial term there is either an annual increase by a fixed percentage or by CPI, and then when the initial lease term expires there is a market review.
Security deposit/bank guarantee – usually a tenant is required to provide a security deposit or bank guarantee to the landlord from a financial institution approved by the landlord. This is generally a sum equating to three months’ rent.
Outgoings – parties to a lease need to understand who is liable for the various outgoings and in what percentage. We see a variation of clauses in relation to outgoings. Sometimes the tenant is not required to pay any outgoings (perhaps because the rent is higher to accommodate this). On the other end of the spectrum however, the tenant may be liable for all outgoings including land tax.
Guarantee – a landlord often requires a personal guarantee from a tenant. For instance, if the tenant is a company, the landlord may require a personal guarantee from the director(s) of the tenant company guaranteeing the tenant company will meet its obligations under the lease including the requirement to pay rent.
Make good/reinstatement –the heads of agreement or lease may not actually use the words, ‘make good’, but this is a term used to refer to clauses which require the tenant to restore or reinstate the leased premises to the state they were in at the time the tenant took possession. Depending on the terms and scope of the ‘make good’ clause, this could be a significant and costly process. For example, if you fit out the premises, you may be required to completely strip out the premises and restore it to the state it was in when you first took up occupation.
Legal costs – sometimes leases require the tenant to pay the landlord’s legal costs in relation to the negotiation and preparation of the lease.
Retail Leases – if your business falls under the description of a retail shop business under the Retail Leases Act 1994 (NSW), and none of the exceptions under that Act apply, both parties will be required to comply with various provisions of the Act, for example, in relation to disclosure.
Harris Freidman Lawyers can assist you in the negotiation of your lease and review any ‘heads of agreement’ prior to your signing. Call us today on 9231 2466 to talk to one of our experienced property/commercial lawyers.