By Alexandra Geelan, Lawyer
Negotiating a commercial or retail lease can be a daunting and confusing experience for many business owners, and particularly for first-time tenants. In this article, we will break down the process and some practical aspects of lease negotiations. It is important for both parties to a lease to actively participate in lease negotiations to ensure that their interests are adequately protected and that there is sufficient clarity in the lease.
If you haven’t already, check out our earlier articles in the series on why it is important to not simply sign the first lease given to you (https://www.lawsquared.co/blog/commercial-and-retail-leases-1) and what the differences are between retail and commercial leases (https://www.lawsquared.co/blog/commercial-and-retail-leases-2).
What is a Term sheet and why do i need one?
Many lease negotiations will start with a Term Sheet (a.k.a a Heads of Agreement or Offer of Lease). This is a basic document that sets out (often in a table format) the essential commercial terms of the lease such as:
the party details;
the terms of the proposed lease and any options;
a description of the premises;
the base rent payable;
any included or excluded fixtures and fittings;
any landlord’s contribution to fit-out;
insurance requirements; and
any special conditions.
Term Sheets are often prepared and provided by the leasing agent based on standard template documents. In many cases the Term Sheet is signed before the parties engage their lawyers; however we recommend that parties to a lease seek advice on the Term Sheet to ensure that they have not missed any key terms that arose during the initial negotiations between the parties and that they are not agreeing to terms that are contrary to their interests.
A Term Sheet is usually drafted in very commercial language, as opposed to the more formal legal language of a lease. It is not a comprehensive summary of the terms of the lease, but rather focuses on the unique or specific terms of this lease. It often does not deal with standard terms such as maintenance and repair obligations, access rights, use rights and restrictions, and relocation and demolition.
Critically, parties to a Term Sheet will usually not be able to renegotiate the commercial terms like the rent payable or term of the lease once the Term Sheet is signed. The lease will simply be drafted to reflect the terms in the Term Sheet.
What can I negotiate in the draft lease?
In most cases, a draft lease will be provided by the landlord to the tenant for negotiation. For retail leases, the relevant retail lease legislation often requires that the landlord provide the tenant with a copy of the proposed lease and a disclosure statement at least 7 days before the lease is entered into; this is designed to allow time for the tenant to consider the lease and negotiate its terms.
Many tenants mistakenly think that they are not able to negotiate the terms of the lease at all and will simply sign what they have been provided. However, in most cases, there is scope to negotiate at least some of the critical terms of the lease, and there is a large range of common terms that can be cherry-picked to suit your interests.
Inevitably, a draft lease provided by a landlord will favour the landlord’s interests and shift most responsibilities and liabilities to the tenant. The extent to which a tenant is able to rebalance their rights and obligations depends on a range of factors including the bargaining power of the parties, the size and value of the lease to the landlord and how eager each of the parties are to secure the lease.
For example, if the premises have been vacant for a substantial period, the landlord will be eager to secure a tenant and may be more willing to compromise on certain clauses of the lease. Conversely, if the premises are in a high demand area and the landlord has plenty of prospective tenants to choose from, then a tenant’s scope to negotiate the terms of the lease will be severely reduced.
Lease negotiations, as with other contract negotiations, are a matter of compromise. Parties should consider what issues are really important to them and be prepared to let go of issues that are not as business-critical.
Landlords also often have an advantage in most commercial or retail lease negotiations because they know and understand the history of the premises. For example, they may know that the air conditioning has been acting up and may be due for a replacement in the short term and so may seek to shift responsibility on replacing the air conditioning unit to the tenant. Tenants should ask the agent and owner as many questions as possible, as well as carrying out their own investigations and inspections to try and even out this knowledge imbalance.
What are all these other documents with the lease?
The proposed lease is rarely the only document provided by the landlord. In most cases, the tenant will receive a stack of documents to review, consider and approve.
Landlords of retail premises are required to provide a Lessor’s Disclosure Statement in a prescribed form which contains key information for tenants including:
details of existing fixtures and fittings;
whether there is a head lease in place;
details of lessor and lessee works (if any);
information and estimates of outgoings and any other costs payable by the tenant;
core trading hours;
shopping centre details (if any); and
details of any other disclosures or representations made by the landlord.
The tenant is required to sign an acknowledgement that it received the Lessor’s Disclosure Statement.
Tenants are also often required to provide a Lessee’s Disclosure Statement that contains information about the tenant’s business including any other retail shops leased by the tenant in Australia, whether the tenant believes that they will be able to meet the financial and other obligations of the lease, details of their relevant business experience and details of any statements or representations made by the landlord that the tenant is relying on.
Tenants are also often required under applicable retail leases legislation to obtain Legal and Financial Advice Certificates confirming that they have received legal and financial advice on the terms of the lease.
Most retail lease legislation also requires that the landlord provide the tenant with a standard information brochure produced by the small business commissioner or equivalent. The information brochure contains information about the applicable retail leases legislation and the statutory rights and obligations of parties that cannot be contracted out of in the lease.
As we outlined in an earlier article (https://www.lawsquared.co/blog/commercial-and-retail-leases-1), it is not necessary for commercial leases to comply with the requirements in the retail leases legislation. However, many landlords include similar requirements in commercial leases as ‘best practice’.
In addition to the disclosure statement, the draft lease may also be accompanied by a plan of the premises identifying the specific premises being leased, shopping centre rules (if any), and the landlord’s requirements for insurance and/or bank guarantees. It is important that the tenant review and, if necessary, comply with the documents provided by the landlord as failure to do so often constitutes a breach of the lease.
Execution of commercial and retail leases
Once the documents have been negotiated and finalised, they are ready to be executed!
Leases executed by companies should be signed in accordance with section 127 of the Corporations Act 2001 (Cth), that is, by its sole director, by two directors, or by one director and the company secretary.
Once the lease is fully executed, the landlord will arrange for the lease to be registered with the relevant state or territory Titles Office for registration on the title for the land. This protects the tenant’s interests from any other interests against the premises.
At Law Squared, we partner with passionate entrepreneurs and businesses who need our technical help and expertise in many areas. We’d love to have a chat with you, so feel free to drop us an email at firstname.lastname@example.org.
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