Four important clauses that a landlord should consider when entering into a commercial lease

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Entering into a Commercial Lease can be a daunting task for a Landlord, especially if you are new to commercial leasing. There are so many clauses to consider, and your property lawyer will often advise on many of these.  From our extensive knowledge dealing with both Landlords and Tenants alike, we would like to offer you some valuable advice on what we believe are four important clauses you need to consider to ensure the lease is beneficial and secure for you.

Term of Lease

a. Does the length of the lease suit your long term plans for your asset? 

We always recommend that the Landlord considers their future plans of their asset before they enter into a lease. 

b. Do you want to allow for an option period, which allows the tenant to take up once they provide the required notice as outlined in the lease?

This would mean that the tenant decides if they enter into an additional lease term with the same lease conditions. The alternative is to not offer an option period, and wait until the end of the first term to decide if you want to enter into a new lease with the same tenant.   This allows you to make the decision on any additional term. It also means that you get to change any of the conditions of the lease.

Tenants normally always push for an option.  Our advice is to not offer one unless you have to.

We always recommend that Landlords include a demolition clause in all leases, allowing for six months’ notice, giving the tenant a six months’ rent free period.  This clause gives the landlord freedom to consider the sale of the premises throughout the term of the lease.
 

Outgoings

We always suggest that a landlord either enters into a gross lease, or provide an outgoings estimate to the tenant, to be charged monthly, based on the previous year’s actuals.  This can be reconciled after each financial year, and adjusted up or down accordingly. We highly recommend not locking into a fixed amount over a number of years.   

On some occasions we have seen tenants three or four years into a lease paying way below the actual cost of outgoings, because the lease stipulates a fixed amount. This results in the landlord paying the remaining balance.    
 

Make Good

The Golden Rule is; The fit out is only as valuable as your next tenant perceives it to be. 
Always ensure the lease contains a strong Make Good clause that contains exactly what is required of the tenant at the end of the lease.  A tenant is often mistaken by believing their fit out is adding value to the Landlord’s premises, and will try their best to convince the landlord of this at lease negotiation stage. 

If the incoming tenant wants the fit out removed after the previous tenant has moved out, this will be at the cost of the landlord.   This can be very costly at times, particularly with removing flooring, tiles and built in units.
 

Termination Clause

We recently met with a distressed Landlord looking for our help, as they had just discovered they had entered into a lease with a tenant that did not contain a termination clause.  The tenant was refusing to pay a rental increase, and the Landlord had very little rights without the ability to issue notice to vacate.

It is imperative that a landlord has a tight Termination Clause within the lease.  We recommend that the clause includes that the Landlord has the right to issue Immediate Notice to Vacate, once the tenant is 14 days in arrears.  This will provide the Landlord with sufficient time to find a new tenant without having to cover the cost of a non-paying tenant in situ. The longer a tenant in arrears is allowed stay, the more costly it will be for the landlord.
 
Property management is one of the specialised professional services offered by LJ Hooker Commercial South Sydney to both institutional and non-institutional owners. Our primary objective is to provide comprehensive, cost-effective property management while simultaneously exceeding industry standards.

To discuss the leasing and management of your commercial property, please call either Daniel O'Brien on 0404 860 747 or Aoife Bill on 0468 877 564.