commercial lease

What is a Commercial Lease?
A business property lease or commercial lease is a legally binding contract between a business owner (tenant) and the commercial property owner (landlord). A tenant under a lease has a right to exclusive possession, meaning they can exclude all third parties including the landlord from enjoying the benefits of the property until the lease is terminated.

 

However, there are exceptions to exclusive possession, the landlord can enter the property for specific reasons, including general inspection, conducting repairs on the premises, carrying out other legal responsibilities, or activities such as valuation or advertising and selling the premises.

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A lease also means that the landlord cannot remove the tenant from the property until the lease is terminated, whether that be due to the lease expiring or the tenant breaching the lease agreement.

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Commercial lease agreements are generally more complicated than residential leases, because commercial leases are usually heavily customised to the individual situation. The lease terms and conditions need to be very carefully reviewed to make sure that they match the needs of your business, as any mistakes at the beginning could make or break your new business.

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TYPES OF LEASES

Retail leases

Retail leases are a type of commercial lease, however they are governed by the Retail Leases Act 2003 (Vic). Properties will generally have a retail lease if they are primarily used for retail purposes such as the sale of goods and services. The legislation enhances the fairness and certainty of the arrangements made between landlords and tenants for retail leases. It also provides the tools and mechanisms needed to resolve disputes relating to retail leases.

 

Commercial leases

Commercial leases generally apply to buildings that are used for a commercial use such as a warehouse, office, or any building that is used primarily for a business. Unlike retail leases, commercial leases are not regulated by legislation, thus the terms of the contract vary, are negotiable and often favour the landlord.

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Ultimate consumer test

Due to the flexibility of commercial leases, it has always been favourable for landlords to enter into one, this is why understanding the distinction between commercial and retail leases is important. In 2017 the Victorian Supreme Court constructed a test that allowed them to distinguish between a retail lease and a commercial lease. The test is now known as the Ultimate consumer test. The ultimate consumer test considers whether the services that the tenant provides are used solely by the purchaser, or are they passed on to a third person. It is important to note that the Ultimate consumer test does not solely determine whether a lease is of a retail or consumer nature, other factors such as whether a fee is paid, and the services being offered are also considered.

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Licence

A Licence is not a lease. A Licence does not offer exclusive possession, instead a licence grants permission to third parties to enter onto property for a specific purpose, where without the licence, entry onto the property would usually be considered trespass. This also means that unlike a lease, the licensor has the right to remove the licensee from the premise at any time. Licences are sometimes used when a purchaser wishes to move into the property they have purchased before the settlement date, or to allow the vendor to stay on the property after the settlement date.

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Can I negotiate the terms?
Yes, lease terms are often negotiable. The specific terms or restrictions which may be up for negotiation include the rent amount, rent increases, the duration of the lease, the modifications you can make to the property and whether you can transfer or assign the lease.

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What else should I look for?
This is hard to answer without knowing your specific situation and your business requirements. Some of the common things we find we need to discuss with clients include:​

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• If you’re a new business, check that the length of the lease suits you, as many landlords prefer to lock in a longer lease.

• There are several ways to calculate rental increases so make sure you understand and agree to the one chosen by your lessor.

• Read the section on property improvements very carefully as it should set out who can make changes, who pays for the modifications and whether you have to return the property to it’s original condition at the end of the lease.

• Make sure the lease includes all of the areas you expect to use including bathrooms, parking areas and common areas.

• Be careful that the lease doesn’t stop you from erecting signs in certain areas.

 

Please seek legal advice before you make any commitments, including signing an offer, paying a deposit or moving anything you own into the property.

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