Commercial Leases: The Top 10 Things Landlords and Tenants Need to Know
So you’re a first time commercial landlord or tenant and wanting to know what you need to know about commercial leasing. Here are the top 10 questions we tend to get asked when dealing with new landlords and tenants.
1. What is a Lease?
A lease is a detailed document setting out the relationship between the landlord, usually referred to as a lessor, and the tenant, usually referred to as a lessee.
A lease will contain key information such as the amount of rent and the length of the term and any options to renew that term.
The lease document will also contain clauses that deal with other events such as default by the tenant, installing and removing the fit out, who pays what in terms of outgoings or expenses associated with the premises, increases to rent and outgoings and things of that nature.
2. What are the rights of landlords who own retail properties?
Landlords have rights, so long as you make sure your leases are in accordance with the Retail and Commercial Leases Act and you act in accordance with the Act.
In fact, given we are talking about commercial situations, a landlord of retail shop lease has much more in the way of rights than a landlord of a residential tenancy.
3. What are the rights of tenants who wish to lease retail properties?
A lease will be a retail shop lease if it meets the criteria set out in the Retail and Commercial Leases Act 1995.
Although there are some exceptions, a retail shop lease is a lease of premises situated in a retail shopping centre at which goods are sold or services are provided to the public.
The fact that the property will be subject to the Retail and Commercial Leases Act is important because the Retail and Commercial Leases Act gives tenants a lot of rights, principally a right of tenure whereby the tenant is guaranteed if they want a minimum term of five (5) years.
4. As a landlord, should I have a lawyer to assist me with a new lease?
In regards to a new lease, you should engage a lawyer to assist, keeping in mind that conveyancers can be just as capable of drafting a well structured, secure lease.
5. As a tenant, should I engage a lawyer to assist with a new lease?
Probably although a conveyancer will also be able to give advice although not legal advice in relation to the terms of a new lease. The average lease is between 30 and 70 pages long. Some of the lease clauses will be relatively standard while other clauses may be unusual and may impact on the tenant’s rights.
Almost all leases have very wordy clauses and they often need a bit of explanation and interpretation.
A lot of standard type leases may not be helpful to the tenant at all and the landlord should approach a lawyer to receive some advice in relation to things which might be included in the lease to protect themselves and things that might be excluded subject to agreement from the landlord.
6. What are the key features of the Retail and Commercial Leases Act I need to know about regarding a lease?
Obviously the most important key feature is the right of tenure. This means that a tenant has a right to a minimum of five years including any options to renew the lease.
Whilst it is the tenant’s call as to whether they decide to have a one plus two plus two lease, for example, they are guaranteed in those circumstances to have a minimum of five years if they so choose. A lease can be for a head term of five years or any combination that totals five years.
For example, a lease with a head term of one year with two rights of renewal for two years each would be in accordance with the Act as the total term is five years. On the other hand, a lease with a head term of two years and one right of renewal of a term of two years would be contrary to the Act and would be illegal. In those circumstances, the tenant would be guaranteed to a further year.
7. What are the other features of the legislation?
A landlord must provide a copy of a proposed lease to any prospective tenant when negotiations begin. So when the tenant approaches their landlord for a new lease, the landlord must provide before entering into the new lease a draft of the proposed lease so the tenant will be able to get advice in relation to the terms of the proposed lease and perhaps agree to change various terms of the draft lease.
The landlord must also provide the tenant with a disclosure statement before a lease is entered into. This disclosure statement is a very important document, almost as important as the lease documentation itself.
The disclosure statement sets out all the monetary and legal obligations of the tenant in relation to the lease such as what the rent is going to be, how that rent is going to be affected in future years, what the outgoings are going to be in relation to the property, what obligations the tenant may have in terms of a fit out and the cost of that, what the tenant is obliged to pay by way of preparation costs for the lease. It is important that in the negotiation phase that it spells out every particular regarding the lease before the tenant actually commits to the lease.
8. What important factors should be considered by the tenant when negotiating the lease?
First of all, the tenant should look at the term and options to renew. The tenant may wish to if possible negotiate beyond the five years. In other words, the tenant might like to see how things go in the first year and commit to a one plus two plus two year term so that they have got one year that they are obliged to fulfil and if things don’t turn out the way intended, the tenant can leave the lease. You must remember that when businesses fail it is usually within the first five years so it is important to be able to opt out for example in the first or second year of the lease .
9. What other things are there to look at?
The other critical issue is the rent. If the leases are one plus two plus two, it will set out the base rent for the first year. More than likely the rent will go up for the second two year term and the third two year term in which case the tenant must negotiate a modest increase if the rent is to be increased at all. Rent can be increased by agreement by way of a percentage say 5% at the end of the first year or the second term or it might increase by reference to the Consumer Price Index.
10. When should I consult Di Rosa Lawyers?
We have acted for many landlords and tenants over the years. We can prepare a lease for you if you are a landlord or give you advice regarding the terms of a draft lease if you are a tenant.
We can assist you in the enforcement of your rights if you are either a landlord or a tenant.
If you are uncertain about your situation in any way, and need advice, or indeed representation if you are in dispute with the other party, we can assist you whether you are a landlord or a tenant.