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Clarity is critical in commercial leases

14 November 2016

Creating clarity and building good relationships with both your client and tenant is critical when developing commercial leases.

REINSW CEO Tim McKibbin and Barry Johnston of Balmoral Partners, shared their best practice advice on completing a Heads of Agreement and Agreement for Lease.

Heads of Agreement

There are many essential items to include in a Heads of Agreement (HOA) from who pays the legal fees, how much the bank is guaranteed for, where the deposit goes, and what is in the make-good.


The HOA sets out the terms of a lease, but is still subject to approval and is non-binding. Barry explained: “It is extremely important to get the details right in the Heads of Agreement because it allows you to maintain control of the transaction.

“You want to make sure by the time it gets to the lawyers there is no question about what the terms are and there is no room for different parties or representatives to try and change what has already been agreed.”

Barry’s standard HOA form includes the property’s address, details of the parties, main items of the lease (where relevant), the terms, start date, and rent per square metre. However, there are variations depending on the scenario.

There is often an incentive payable or provided to the tenant whether it is rent free, or a rebate. This is included in the HOA, but not the lease, which is separate.

Avoid making representations

Barry added: “You need to place responsibility on the tenant to satisfy themselves to the suitability of the property.  “We tell the tenant we take no responsibility to the suitability of the property for its use.”

He added that the HOA should be sent to the client first to review, before being sent to the other side. It should also be kept as realistic as possible especially with comment dates, because if you can’t deliver on it, “you set yourself up for a disaster and people will get annoyed”.

Build a good relationship

Barry said: “You have a relationship with both of the client and tenant and you have to do the right thing by both of them if you want to deal with them again.

“I find if you bring issues to attention of the parties they may not have thought of they really appreciate and respect it, even if it is not what they want to hear, because you are anticipating risks down the track.”

Tim said it was important agents spend time on their precedents and critical to ensure they gain all the necessary information during discussions. 

He added: “You can never be too clear in these leases and it is important that your representations are 100% accurate.”

Agreement for lease

The agreement for lease is a binding agreement, subject to a number of items, between a landlord and prospective tenant to grant and/or to accept a lease.

It sets out what the tenant is responsible for and is more common with properties being leased which have been built.

Tim explained: “When selling off the plan the requirements need to be clearly specified because they live only in drawings and it is easy for people to have different perceptions about what the property will deliver.”

Barry added: “There are more variables when you are transacting a property that hasn’t been built yet, which could be anything from the weather, building supplies, labour disputes, builders going broke, to a whole range more.”

To find out more on commercial leases, including on retail leases, watch the REINSW webinar here.