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How to negotiate a commercial lease

By Greg Bell

If you have a commercial property, you need a tenant to make it financially viable. Finding a tenant can be its own challenge, but once you do have a potential renter on the line, the important thing is negotiating a lease in your favour. Important considerations for these conversations include:

Deposit

A security deposit can be obtained by the landlord from the tenant. This may be cash placed in an escrow account of a bank guarantee taken out by the tenant in your favour. This should be non-negotiable, although you can be flexible about the specific amount as long as it meets legal requirements.

Rent review

You can implement rent hikes based on the fixed annual percentage increase, an annual rental review tied to the consumer price index or a market review based on rents of similar commercial properties in the same market? Rent increases — or the lack thereof, depending on circumstances — can be a terrific negotiating tool down the line if you want to keep a tenant in place.

Outgoings

Describe the property accurately — i.e., whether the tenant is leasing part or all of it — and agree on who will be paying which outgoing costs. Anything the tenant is responsible for should be clearly assigned, and you must implement a reliable method of assuring the outgoings are taken care of.

Lease terms and options

You can settle on a fixed lease term and provide options for future renewal. If your tenant decides to continue with the lease, they can exercise their options before the term runs out. Negotiate at what point you need notice as to whether the tenant will renew.

Fitout and use

You may need to make contributions to any fitout you require on the premises and this can be affected by how the tenant plans to use the premises. Discuss this ahead of time and put it in your commercial property lease so there's no confusion. You should check to see what the intended use is and follow up to ensure the tenant has the required permits and licences for that particular purpose.

Retail leases

If your tenant plans to use the property for retail, the lease is a little more complex. The Retail Leases Act 2003 applies in most of these cases. You must ensure that the lease mentions it and that the contract itself has been prepared and executed in accordance with the Act.  

After drafting a Heads of Agreement document, you'll need to have your lawyer send a copy of the proposed lease to the tenant's lawyer. Once all amendments and negotiations are complete, the lease can be signed and executed.

Are you looking into commercial property investment? Contact Ray White Surfer's Paradise for help finding the perfect property today.

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