A lease is a contract by which one party (the landlord) conveys to another party (the tenant) land which can include buildings for a specified period in return for a rent. The arrangement allows an owner in many cases to derive an income from land and buildings without having to carry on a business. A lease can also be used by an owner to enable a related entity to carry on business on property but to avoid any creditors of the business claiming over the land and buildings. The terms of the lease are negotiable so that it is always wise for both a landlord and a tenant to employ legal and financial advisers to consider the various terms. Many leases will include the following: –
- duration of the lease and right to renew or end the lease before it expires
- formula for calculating and reviewing the rent
- possibility of subletting the premises
- restrictions of the local town planning laws on types of services or goods that can be traded and trading hours
- landlord’s obligations to maintain any building
- rights to end the lease or a temporary reduction of the rent and outgoings if the premises are damaged or destroyed
- limitations on the ability of the tenant to transfer or assign the lease and the expense involved
- responsibility to pay for rates and taxes and any other outgoings and repairs of any building during the lease
- costs of lease and which parties should pay those costs
- types of insurance required, who will pay for it and who obtains it
- restrictions on the removal of fixtures and fittings
- obligations to redecorate during the term and reinstate when the lease ends
- consequences of failing to pay rent or other breaches of the lease
- relocation of tenant
- demolition of any building
- payment of a security deposit
- terms of any personal guarantee and indemnity (which is commonly required for the directors of a corporate tenant)
A few matters should be considered before entering into a lease: -
1. Duration (term)
It is important for a tenant to ensure the duration of the proposed lease is long enough to be able to recoup the initial investment and to make a profit. After the expiry of a lease, the landlord is under no obligation to renew that lease and the tenant will have to find alternative premises then to carry on business. Frequently goodwill is attached to premises (customers visit the premises in many cases) and it is therefore important to protect the use of the premises.
An option is a right to renew a lease at the discretion of the tenant. Those tenants starting out in business may choose to have shorter option periods so that they can remove from the premises if business does not produce the planned outcome. Alternatively, for a longer established business, longer options may be preferable. This means, however, the tenant is bound by the term of the lease during the initial term or the option period unless released by the landlord in the event of termination of the lease.
Individual leases have specific requirements on how options have to be exercised including the length of notice which has to be given by a tenant to the landlord. Those requirements should be considered very carefully as failure to give the appropriate notice at the appropriate time can lead to loss of the option.
3. Rent and Rent Reviews
The amount of rent payable and the rent reviews are generally matters of negotiation. It is important to ensure the correct starting rent is established and if there is any doubt, a valuer should be consulted. Comparisons are also very useful.
The most common types of rent review include:
- consumer price index (CPI)
- fixed percentage increase
- fixed amount
- market rent
It is common for rent at the commencement of each option period to be determined according to market and usually there is a detailed formula as to how this rent is calculated. The intervening rent reviews are frequently based on the state of the economy and in many cases are simply a guess as to the best method of reviewing the rent for a landlord. Rents calculated as a percentage of turnover are occasionally also used by a landlord, but it is a question of whether a landlord has confidence in the tenant being able to reach a certain level of turnover or not.
4. Permitted Use
This should be wide enough to allow a tenant to develop the business into related areas.
This article is written with a view to providing both landlord and tenant a brief view of a typical lease. Inevitably the interests of landlord and tenant will not coincide on all matters and therefore it is important to obtain independent legal and financial advice.
The information contained in this article is not advice and should not be treated as such. It is based on Queensland Law and where applicable Commonwealth Legislation. You must not rely on the information in this article as an alternative to legal and financial advice from a properly qualified professional. If you have any specific questions about any legal and/or financial matters, you should consult an appropriately qualified professional.