How to negotiate better lease conditions for your commercial property

By Greg Bell

Are you planning on leasing a commercial property to a tenant either as office or retail space? Understanding your rights and obligations as a landlord can help you negotiate the best terms possible.

As a rule, leases are typically written to favour landlords, but deviating from approved lease language can leave you vulnerable later. Avoid problems when leasing commercial property by making sure your commercial lease includes terms that protect you and your investment, and which keep you compliant with relevant laws.

Is the lease for a retail or non-retail business?

There are significant differences between retail and non-retail commercial leases.

Commercial leases
A non-retail commercial lease typically applies to office locations, warehouse spaces, or industrial sites. There is wide latitude for negotiation in a Commercial lease, and you can negotiate with your tenant regarding clauses that define rent payment, rent increases, repair or maintenance obligations, and who pays for lease preparation.

Retail leases
A Retail Lease will be regulated by the appropriate local Retail Act, and applies if the property is used to sell goods or provide services. Land taxes and lease preparation are the responsibility of the landlord, and you must typically provide a Disclosure Statement to your prospective tenant before the lease can be entered into.

Negotiating the best terms for your commercial lease

You can minimise risks with your Commercial Lease by ensuring that the lease protects you and lays the most burden of responsibility on the tenant. The following items are of importance:

Rental amounts
Ensure that the rent you charge is sufficient to cover costs that as a landlord you are required to bear. Charge enough rent to cover the following:

  • Your rates and/ or body corporate fees without a deficit
  • The insurance you are required to carry on the property
  • All required fire safety equipment that is also your responsibility

Make sure that the terms and conditions as well as the method and dates of rent payment are clearly outlined.

Rent increases
Build allowable rent increases into your contract annually. There are three types of rent increases:

  1. Fixed percentage increases. These are typically equal to anywhere from 2% to 5% annually. This rent increase is usually easy to enforce because it is a set amount and thus predictable.
  2. CPI rent review. This increase is tied to the Australia Bureau of Statistics (ABS) publication and is typically quite low. Many landlords choose a combination of CPI and fixed percentage increases to account for shifts in both the market and the economy.
  3. Market rent review. This is the riskiest way to manage rent increases, as the market can be unpredictable. In a Retail Lease, “rachet clauses” which prevent rents from decreasing are specifically disallowed.

Security bond or guarantee
Obtain an appropriate bond for a minimum of three months of rental. This can either be a cash security bond (which must be deposited in a special interest bearing account) or a bank backed guarantee. If needed, you can recover damages from these sources. If there are no damages, the bond plus interest or the guarantee documents must be returned to the tenant.

Tenant insurance
Require your tenant to both obtain appropriate public liability insurance, and insure their own fittings. If appropriate, you may be able to insert a clause demanding you be named as an interested party on the policy.

Clarify that it is the responsibility of your tenant to maintain the building and the grounds. Declare that inspections must be performed regularly to ensure the premises and grounds are kept in a good state of repair.

By negotiating these terms, you can best protect your investment and profit accordingly from the lease of your commercial property. If you are interested in commercial property management, contact the team at Ray White Surfers Paradise today.

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