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The essentials of a commercial lease

23 April 2018

Would you like to learn more about commercial leases and the important role they play? In a recent webinar with REINSW, leading commercial agents Bobby Suminoski and Shaun Kenney discuss the key elements and clauses of a commercial lease. 

What is a lease?

“Essentially a lease is a legal contract between a landlord and a tenant for real estate. It’s binding on the parties and is a formal commitment around a set of obligations,” Shaun said. 

Bobby added: “The lease is a handbook that contains all the answers to all the questions that might be posed to us as agents by owners or leasees.”

What is a heads of agreement?

Shaun: “The heads of agreement is the precursor to a lease. It’s basically a document that outlines the key commercial terms of a deal. It’s a non-binding agreement and it reflects the commercial intent of the parties.”

What is the general approach to expiring leases?

“Approach the tenant as early as possible. That puts you in the best place to secure a renewal or understand what the tenant’s requirements are moving forward,” Shaun said.

What sections are contained in a lease?

Bobby outlined the key elements and clauses found within a typical commercial lease:

Reference schedule – a summary of all the major terms and conditions e.g. the parties, when the lease commenced, the rental commencement, etc.
Definitions of all the fundamental terms and terminology contained within the lease – generally based around performance of the tenant and owner
The parties
The legal premises being leased
The term – an outline of the commencement and expiration of the lease
Building rules and regulations
Tenant obligations
Landlord obligations
The rent
Rent review each year
Fixed per cent increases
Insurances e.g. public liability and plate glass
Lease security provided by the tenant to the owner

Options to renew

“An option generally favours the tenant. It’s a renewal term following the expiration of the initial term. The notice period is generally around three to sixmonths prior to the expiration of the initial term. Generally speaking the terms and conditions are identical,” Bobby said.

Lease administration

“It is very important for commercial property managers to understand the lease. You’re the ones dealing with the enquiries from tenants. If you understand the lease, you’ll be able to give better answers,” Bobby said.

“Reading the lease is absolutely essential for property management,” Shaun added. “When critical dates come up, refer back to the original source document and use that as an auditing process. It’s the same for outgoing reconciliations.”

Permitted use

“This stipulates what the premises can and can’t be used for. Typically the development application will have general parameters around what a property can be used for,” Shaun said.

Condition reports

Shaun: “This is usually an annexure to the lease that documents the condition of a particular space.” 

Holdover provisions

“This provides an option for the tenant to hold over beyond the end of the expiry without entering into a new agreement, often at the discretion of the landlord,” Shaun said.

Watch more webinars about commercials issues on the REINSW webinars on demand page here. They include topics such as fire safety for commercial property; the main changes to the Retail Leases Act; avoiding commercial claims; commercial practice: the end of a tenancy, and much more.