Understanding Commercial Tenant Rights In Australia

March 26, 2021
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Commercial Real Estate

To understand the legal rights of commercial tenants in Australia, you’ll need to understand:

  • what a commercial lease is
  • the differences between residential and commercial property
  • key issues that trip commercial tenants up

That’s because each property category has its own unique set of laws that influence tenant rights. What’s more, the protections offered to residential and commercial tenants are pretty different.

In any case, keep in mind that no two leases are the same. So, if you’re unsure about anything, seek professional advice before making any commitments.

What is a commercial lease?

A commercial lease is a contract between a landlord and a business to rent an office, industrial or retail property.

Many businesses will choose to lease commercial property instead of buying. This saves them from investing large sums of capital and tying up cash flow in bricks and mortar.

Differences between residential and commercial tenants rights

When it comes to residential property, there are various laws in place to protect tenants.

This is not the case with commercial real estate. That's because policymakers assume business people have higher commercial acumen. And, therefore, a better grasp of the clauses within a commercial leasing agreement.

Commercial property can also vary a lot in terms of what regulations and laws are in place. For instance, retail shops tend to be heavily regulated. On the other hand, other commercial spaces, such as office space or general industrial units, do not attract the same level of control. The exception is when an industrial site is used by an industry that is heavily regulated or licensed, and health and safety laws are in place.

Compared to residential agreements, commercial leasing agreements also tend to be more complex and need more consideration because they vary a lot from lease to lease. This is partly because there is more room for negotiation on the terms, requirements, and rules in a commercial lease without the same laws and protection.

Local Laws

Local laws also influence commercial tenant rights. That's because each country, state and territory have legislation that regulate commercial agreements.

For instance, if you’re leasing retail premises, your rights are set out under both state-specific legislation and your lease. Of course, what's written in the lease must meet the local rules and legislation.

For example, in New South Wales, retail leases are governed by the Retail Leases Act 1994. There are also a few other acts that affect the creation of commercial leases, including the Conveyancing Act 1919 and the Real Property Act 1900. This means landlords leasing retail spaces must abide by these laws when drafting leasing contracts.  

Commercial leases, on the other hand, are less regulated than retail leases. And most details agreed between tenant and landlord.

Commercial Leases

Where potential issues can arise in commercial leases

Stay aware of a few key clauses that can trip up commercial tenants:

Renewal clause

Be sure to check that there is an option to renew the lease after your current term expires. Without this option, there's no guarantee you’ll be allowed to continue operating in the premises past your initial lease term.

Ratchet clause

It’s important to check if a ‘ratchet clause’ has been inserted into your contract. Rent reviews should reflect current market rates. But ratchet clauses prevent the rent you pay from going down, even if the rent you're paying is higher than market value. These clauses are illegal for retail contracts. But they are legal for other types of leases. If your agreement proposes a 'ratchet' clause, negotiate to have it removed before you sign.

Rental increases

Commercial leases usually include one of three methods for periodically calculating rental increases:

  1. CPI rent review – An increase based on the current consumer price index (CPI) rate is considered the fairest commercial rent review technique for tenants. However, landlords with high-demand properties are generally unwilling to settle on this method as it reduces their return on investment.
  2. Fixed percentage increase – A fixed percentage increase is an increase that is mutually agreed upon by you and your landlord before your lease is signed. It usually falls between 3-4% and is favoured by landlords because it's a relatively straightforward process.
  3. Market rent review – If your lease is about to expire, and you have an option to renew, there's generally a provision to review your rent to reflect current market rates.

Mortgage

If the commercial property you're leasing has a mortgage, you need to check that the mortgage lender has agreed to lease the property to you. Without this approval, there is a risk the lender could terminate the lease if the landlord doesn't pay the mortgage.

Refurbishment clause

This clause could allow the landlord to refurbish the premises whilst operating there, disrupting your lease and day-to-day business operations.

Outgoings

Outgoings are a landlords’ reasonable expenses associated with the running and maintenance of a commercial property. If adequately documented, the landlord can pass these costs onto the tenant.

As a rule, tenants are usually responsible for their own operating expenses (such as phone, electricity and internet). They'll also be up for some of the landlord's property expenses (such as council rates or taxes levied on the premises).

Ask your landlord for an itemised list of what expenses you’ll be responsible for and the estimated cost of each one. This will help avoid any nasty surprises down the track. It also pays to understand the base year mechanism for calculating outgoings.

Bond

Your landlord will usually ask for some assurance to protect themselves against the risk of you defaulting on payments or damaging their property (e.g. security deposit or a bank guarantee).

Your landlord will have the right to claim this bond if you breach the terms and conditions of your commercial lease.

Know that, as a commercial tenant, you can ask for an expiry date for a bank guarantee. This date is commonly set one year after your lease expiry. And it protects you against potential claims being made against you by your landlord long after your lease has expired. It also puts the onus on the landlord to raise any issues promptly.

Be sure that your contract provides for the timely refund of your security deposit once your lease expires, provided there are no issues on handover. If you’re a listed company, you may also be able to negotiate so that you aren’t required to give a bond to your landlord.

Lease Exit

Most commercial lease agreements will include a clause that allows you to sublease or assign your lease. But, if it doesn’t, it’s essential to make sure you can do this by negotiating it into your contract.

The clause should stipulate that your landlord’s consent “should not be unreasonably withheld”, rather than vague wording like the consent being “at your landlord’s discretion”.

Make Good

“Making good” is a standard term in a commercial lease that requires a tenant to return a property in the same condition as it was in at the start of the lease.

Unless it has otherwise negotiated, you generally have the legal right to two options for making good:

  1. Making a cash payment to your landlord at the end of your lease for them to complete the necessary “make good” work.
  2. Arranging for a contractor of your own choice to complete the necessary “make good” work.

It’s also vital that there is a dispute resolution procedure in place in your lease to prevent any disagreements over what is necessary to “make good”. Where possible, obtain a dilapidation report at lease commencement to document any pre-existing damage to the property and protect yourself.

Read more about alternatives to making good and how to resolve disputes here.

Repairs and maintenance

Repairs and maintenance like cleaning the premises are generally a tenant's responsibility. However, the landlord should be responsible for mending any structural problems (e.g. wall cracks) and any repairs and maintenance to capital items such as air conditioning systems or other plant and equipment assets.

Note: Often, the landlord will have a preferred HVAC (air conditioning) service provider. As a tenant, you have the right to use another provider. However, you will be liable for the dilapidation period and warranty maintenance on additional equipment installed.

Resolving disputes

When it comes to a retail lease, each state and territory has legislation that sets out the dispute resolution process. Usually, there must be an attempt to resolve the dispute through mediation or settlement before you can take the issue to court.

But, when it comes to commercial leases, the path forward is a bit murkier. Landlord-tenant disputes you cannot resolve privately will have to go to court.

Man with head in hands to represent something that he forgot to negotiate in commercial lease negotiation

Tips for negotiating your commercial lease

Undertake a space survey at the start of your lease

To ensure the area listed in the commercial space description is the size stated, it’s worth undertaking your own space survey to get an accurate measurement. This is especially important because you will be paying your rent per sqm. What’s more, commercial leases usually run over a long period, so getting this correct at lease commencement is worthwhile.

Everything is negotiable

Almost everything in a commercial lease is up for negotiation. But if you lack experience in negotiation, it can be challenging to know where to begin. When you consider that there are over 40 clauses to be negotiated (including rents, incentives and maintenance) in the average commercial lease, it pays to have a professional on your side.

Understand the wording used in your contract

Making the wrong decision could hurt your company in the long run if your commercial lease terms are not flexible or you do not get what you need. Just one paragraph of ambiguous language in a commercial leasing agreement can spark years of stress and may even lead to litigation.

You can get to know some commonly used terms here.

Get a professional on your side

Utilising a Tenant Representative will provide your company with the consultant property experience to sort through the opportunities and unearth the best outcome for your business.  

Tenant CS are experts in commercial leasing and level the playing field when it comes to landlord negotiations. We always put you, the tenant, first and will represent you up to and beyond the handover date.

Are you looking for expert advice on negotiating your next commercial lease, sourcing the perfect space to suit your business needs, or negotiating the best commercial lease terms on your behalf? That’s what we do best!

Contact our team today to see how we can help you.

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