5 Clauses you may not Fully Understand About your Commercial Lease
Understand your lease to avoid unpleasant surprises
Leases for commercial premises are normally around 20 pages or more and generally contain up to 50 clauses. I work in the industry and it took me years to understand commercial leases so it is not reasonable to expect that business owners, who maybe sign one or two leases in their careers, should be expected to understand them.
When you are leasing commercial premises there are so many other things going on that reading and interpreting a long and confusing legal document often ends up in the “too hard” basket. For this reason, I spend a large part of my week explaining various lease clauses to tenants. Today, a tenant phoned to see if the landlords insurance covered their contents. Spoiler alert, it does not. Every week I have queries about what maintenance or repairs the tenant is responsible for, or who has to pay for the replacement of capital items such as air conditioning.
Yet, understanding your lease is highly important for the following reasons:
Negotiate. Understanding the lease allows you to negotiate clauses that you would like amended or removed.
Costs. There may be additional costs in your lease that you are not expecting.
Rights. You may have rights under the lease that you are not aware of, and so you may miss out on exercising those rights.
Flexibility. You may be agreeing to terms that don’t suit your business plan, for example, new businesses might want the option of a break clause or an extra right of renewal.
CP Pro Tip: Before you sign is the best time to negotiate your lease terms. CPP can help you by reviewing your lease and negotiating with your landlord on your behalf.
You must obtain legal advice before entering into any commercial lease, however it is unlikely your lawyer will explain every clause to you. I always ask my prospective tenants the questions, “Do you understand your lease?” and “Has your Lawyer explained the Lease to you?”. If you are not sure about any of the clauses you should always ask.
Here are 5 common provisions in ADLS leases that are commonly misunderstood. For more detailed information, please see my article on Commercial Leases in the CPP Knowledge Library.
1. What Lease Costs am I up for?
There are generally costs beyond rent and outgoings that the tenant is responsible for.
- Repainting the exterior of the building is a major cost that is usually the tenants responsibility. If your Property Manager is not allowing for this cost in the annual outgoings budget you could be up for a bill next time the building needs repainting.
- If your premises are damaged either accidentally or during a break in for example, and there is a claim against the building insurance, the tenant is normally responsible for the excess of the claim.
- You also may be required to periodically replace carpet or repaint the interior of your premises. Some leases also allow for refurbishment of your premises either at the Landlords request or every 10 years for example.
2. What does the Landlords Insurance Cover?
Landlords building insurance covers;
Damage to the the building envelope and any of the Landlords fixtures,
Loss of rents and outgoings (usually between 12-24 months), to cover your rent payment if the building is not able to be occupied after fire, flood, earthquake etc.
Public Liability Insurance
The Landlords insurance does not cover your contents including your fitout, stock, signage, or anything that you own. You also need your own business interruption and public liability insurance.
You should always consult your own insurers to make sure you have the correct cover for your business.
3. What am I Required to Repair at the End of my Lease?
Under the terms of any commercial lease, the tenant is obliged to return the premises to the condition it was in at the start of the lease. This can be very costly and if you have taken an assignment of lease, you are usually obliged to repair damage and remove chattels installed by the previous tenants. Check out my article on tenants Make Good Obligations in the CPP Knowledge Library for more information on this topic.
4. Can I Contest my Rent Reviews?
Yes, if you have market rent reviews you can contest them. The process is outlined in your lease, but you should be aware that you must do so within a certain time frame or you are deemed to have accepted the rent review.
5. What Action Can the Landlord Take if I am in Breach of my Commercial Lease?
A breach of lease can be for non-payment of rent or other costs, failure to maintain or repair your premises, voiding insurances or any other action that is contrary to your lease terms. If you are in breach of your lease for overdue payments the landlord will be able to charge interest on arrears balances. They will also be able to cancel your lease or take take legal action including bankruptcy proceedings if the breach is not remedied.
Landlords must provide notices when you are in breach of your lease giving you time to remedy the breach or reach an agreement regarding repayment of debts or remediation works. CPP can help you negotiate an agreement with your Landlord if you are in breach of your lease.
Taking the time to understand your lease will give you the opportunity to negotiate on terms and avoid any nasty surprises.
CPP can help you understand your lease and advise you or negotiate on your behalf. Check out my tenant representation service. Our initial consultation is always free.
Or you can contact me on email to see how I can help.
Regards,
Kirstin
Check out my Knowledge Library for a more in-depth article. If there is a topic you would like me to add to the library or blog about, please email your question to kirstin@cpp.nz.
Disclaimer: This advice is based on ADLS lease agreements and as each lease is individual it may not apply to your specific agreement. You should always take legal advice before entering into any agreement for lease of commercial premises.
