Some commercial lease terms explained

Commercial property does offer some fantastic investment opportunities, and we know investors who diversify their portfolio by investing in both residential and commercial.

Tenants and landlords of commercial properties are governed by the Retail Leases Act 1994 and while some aspects of both types of lease are pretty much standard, (such as the term of the lease and rent reviews) there are some other points of the lease and common terms a first-time commercial property landlord may not be familiar with.

Here are some of the common phrases and aspects used in a commercial lease explained:

Letter of Intent

At the start of the lease negotiation process, commercial landlords usually ask tenants to enter ito what’s known as Heads of Agreement (sometimes known as Heads of Terms, Term Sheet or Proposal). This is a summary proposal of the commercial terms that both the landlord and tenant would like the lease document to include. Most importantly, it will need to state whether it is binding or non-binding.

Generally landlords offer a non-binding lease heads of agreement with a disclaimer the proposal will not become binding until both parties are happy and there are formal lease documents.

Rental Increase clauses

These are clauses related to rent reviews and will often state the rent will not be less than the amount payable immediately before the review date.

Release and indemnities

You will need a release against claims, damages and loss from the tenant. It is the tenant’s responsibility to have insurance for this. However, this does not mean as a landlord you can be negligent!

Repairs and maintenance

Unlike residential properties, in commercial properties, the tenant is usually responsible for structural repairs and capital costs. In a commercial lease, it is also common for the tenant to be responsible for maintenance, such as leaky taps or broken windows.

Outgoings

The lease must include what outgoings the tenant is responsible for; usually it pays the council, water and body corporate rates. The tenant may ask to see these before they sign on the dotted line, and may negotiate for an agreed cap on the amount payable.

Assignment

Commercial leases do usually allow for a tenant to assign the lease to a third party, but unless stated or agreed to by the landlord, the tenant is still responsible for that lease. For example, if the third party defaults on paying the rent, the tenant is still legally responsible for costs.

We always strongly recommend speaking to a legal specialist so you fully understand what is on the lease, what your responsibilities are and whether amendments specific to your property need to be made.

As one of Newcastle’s longest established real estate offices, we’ve helped hundreds of people realise their financial dreams through both commercial and residential property. If you’re interested in finding out more about investing in either commercial or residential property, get in touch by giving us a call on 02 4956 9777.

Or send us an email to mail@newcastlepropertymanagement.com.au or pop into our Cardiff office for a chat.

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