A commercial or retail lease is not only a significant operating expense of a tenant’s business, but is also fundamentally linked to its potential profitability, goodwill and value. An inadequately negotiated lease may fail to properly meet the tenant’s business requirements, and also has the potential to lead to disputes and/or issues which may prove difficult to overcome and also extremely costly for the business. It is therefore vital that leasing decisions and negotiations are given the necessary care and attention to ensure that an appropriately ‘tenant friendly’ lease is achieved.
What is a lease
A lease is a legally binding contract under which a property owner (landlord) grants a tenant the right to exclusively occupy specific premises for a specified period of time. It sets out the rights and obligations of both landlord and tenant with respect to the premises, including:
- the use to which the premises may be put;
- the length of the lease term;
- the rent and how rent is to be reviewed;
- any outgoings and other costs payable by the tenant;
- repair and maintenance;
- the condition in which the tenant must leave the premises at the end of the lease;
- the consequences of early termination of the lease.
Important pre-lease considerations
A well-considered heads of agreement/leasing proposal (HoA) and proficiently reviewed (or drafted) and negotiated lease are fundamental to protect a tenant’s interests. At the very least, a tenant should take the following pre-lease steps:
Due diligence is imperative. Not only must a tenant ensure that the premises are suitable in terms of physical and demographic area, proximity to and easy access for the tenant’s customer-base, etc, they must also ensure that the premises are able to be lawfully used for the tenant’s proposed purpose. The lease, which is generally prepared by or on behalf of the landlord, will invariably state that the landlord does not warrant that the premises are suitable for the permitted (or any) use, and also that the tenant warrants that it has satisfied itself as to all such matters. Enquiries should therefore be made to ascertain such things as whether local planning laws permit the tenant’s proposed use of the premises, whether any proposed fit-out requires development consent, whether there are any proposed developments, etc, which may affect the tenant’s access to and use of the premises, and like matters.
Once suitable premises have been identified and the due diligence process completed, the tenant should engage in thorough pre-lease negotiations with the landlord or the landlord’s letting agent to agree the commercial terms and other provisions to be contained in the lease. Points for discussion and agreement between the parties include, but are not limited to, the permitted use, the term of the lease and any options to renew, rent and rent review, outgoings and any other tenant costs, and the amount and form of any security deposit/bank guarantee.
Once negotiated, the key commercial terms agreed upon in pre-lease negotiations will be set out in a HoA, which will be signed by both the landlord and the tenant and will be used to form the basis of the initial draft lease.
Obtain professional advice
Entering into a HoA, which documents the pre-lease agreement between the parties as to the terms and conditions upon which the draft lease will be based, is arguably the most important part of the leasing process. Because the HoA forms the initial building-blocks for the lease, it is advisable to seek specialist legal review and advice prior to signing. It is crucial from a tenant’s perspective that the HoA be properly negotiated and documented, particularly as the draft lease will, more often than not, be weighted in the landlord’s favour. Signing a HoA which contains inadequately considered terms may significantly erode the tenant’s negotiating position on the draft lease, and as a consequence, the tenant’s ultimate rights and obligations under the lease may be compromised.