Leasing Matters
By Jessica Douglas
Commercial Leases
If you are a landlord looking to enter into a commercial lease you could utilize a number of different forms of leasees to document your lease agreement depending on the type of lease that you are entering into. It is important from the outset to identify the form of lease that best suits your needs and complies with the relevant legislation.
There are two common forms of leases, these are:-
- A Form 7 Lease that is prepared by lawyers and can be registered on the title to the land with the Department of Natural Resources Mines and Energy (Title Registry); and
- A standard form Commercial Tenancy Agreement.
A Commercial Tenancy Agreement is a standard lease that can be prepared by agents relatively quickly and inexpensively. These agreements are generally utilized to document small simple lease agreements. However, this form of document may not be suitable if the lease is a retail shop lease or the terms of the lease are complex.
What is a Retail Shop Lease?
The Retail Shop Leases Act identifies certain businesses that are regulated by this legislation. If you are leasing to a business that is identified in the legislation as a Retail Shop Business and does not comply with this legislation your lease may be able to be terminated by the Tenant. For example, a Landlord is required to provide a disclosure statement to the tenant at least 7 days before they enter into a Retail Shop Lease failing which the Tenant may terminate the lease.
- Negotiating the Terms of the Lease
In most instances a commercial property agent is engaged to negotiate the terms of the lease with the tenant. The agreed terms are generally recorded on a document called a Heads of Agreement or Proposal to Lease. The Heads of Agreement sets out the key terms of the proposed lease.
Most Heads of Agreement contain a condition which provides that the terms of the Heads of Agreement will not be binding on the parties until such time as the parties enter into a formal lease however these documents can be binding on the parties and are an important document as they form the basis for the drafting of the formal lease.
- Formal Lease
If the lease is recorded on a Form 7 Lease the Tenant may request that the lease be registered on the title to the land to provide any purchasers of the property or mortgagees with notice of the lease. If the Lease contains options a purchaser of the property or a mortgagee taking possession of the property will be bound by the options if the lease is registered on title.
- Security for Lease
It is important for landlords to protect their interests under the lease in the event that the tenant defaults.
There are different forms of security a landlord may require as a term in the lease. These include;
- A bank guarantee – which is an irrevocable undertaking from a bank to pay the landlord an amount stated in the guarantee in the event that the tenant defaults, which is usually equivalent to 3-6 months of rent.
- A security cash bond – a cash bond that is equivalent to a bank guarantee and is commonly held in the agent's trust account.
- Personal Guarantees – where a tenant is a private company it will be difficult for the landlord to determine the assets and financial standing of the tenant and it is common for landlords to request that the directors of the company provide personal guarantees in support of the lease
Conclusion
There are lots of tips and traps for landlords when entering into commercial leases. Landlords or their legal advisers need to be familiar with and up to date on the legislative requirements for commercial leases which are constantly changing.
The property lawyers at Connolly Suthers are assisting owners of commercial properties with their commercial and retail leasing requirements every day and are very familiar with the legislative requirements. Our lawyers take a practical and pragmatic approach in lease negotiations to avoid protracted and expensive negotiations whilst protecting their client’s interests.
If you require assistance with your next lease please ring our Property Law Department. We would be happy to assist.