The six things you need to know about commercial leasing
Commercial leasing can be complex and there are an array of aspects which both landlords and tenants need to be aware of. In this article I will walk you through the top six things that you need to know about commercial leasing.
What is a Commercial Lease?
A Commercial Lease is an arrangement between a landlord and a tenant whereby the tenant operates their business from commercial premises that the landlord owns. A commercial property is a premises which is used solely for business and industrial purposes such as office spaces, factories, shops and studios.
The six things you need to know
1. What is the ‘term’ and can you extend it?
A ‘term’ is the amount of time that the tenant can operate out of the premises. The term is outlined in the lease and the tenant has the right to use the premises for that amount of time. The lease may also stipulate an ‘option’ period which gives the tenant an option to extend their lease for a specified amount of time after the original lease ends.
2. Permitted use
All commercial leases stipulate a particular permitted use which outlines what the tenant is allowed to use the premises for – for instance, warehousing and distribution. The tenant must comply with this use throughout the entire term. A broader permitted use is more desirable for a tenant because it gives tenants the ability to expand their business for other uses during the term.
3. Rent increases
During the lease, the rent amount will be subject to annual increases. The rent increase process occurs through a ‘rent review’. One way that a rent review may be conducted is by comparing the rent to increases in the Consumer Price Index. However, the rent can’t go up more than once every 12 months and the landlord must always inform the tenant of any increases.
In addition to rent, tenants may also need to make other payments such as outgoings. Outgoings are required to be paid only in some instances by a tenant and may include land tax, council rates or water rates.
5. Fit out
Tenants may require specific fixtures or fittings in order to operate their commercial business. ‘Fit out’ is the term which is used to describe the necessary fixtures and fittings which are required. The tenant usually bears the cost for fitting the premises out however, the landlord may want to cover the costs in order to incentivise a potential tenant to take up the lease.
6. Make good
At the end of a lease, the tenant must return the premises to its original condition. This process is known as ‘make good’ - the necessary steps (usually stipulated in the lease) to do so, such as removing fixtures and repairing any damage. ‘Fair wear and tear’ is usually permitted.
It is therefore evident that there are a variety of factors which tenants and landlords need to keep in mind when engaging in a commercial lease. These factors need to be outlined clearly in the lease to ensure that each party understands their rights and responsibilities under the lease.
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