Commercial Leases – The Basics

The grant of a new commercial lease usually begins with heads of terms which are negotiated via a commercial agent and which set out the broad terms agreed by the parties, to include the length of the lease, amount of rent, rent payment dates, rent review provisions and permitted use.

The heads of terms provide a good starting point for the parties’ solicitors, and it is traditionally the landlord’s solicitor that drafts the lease and sends it to the tenant’s solicitor for review.  The tenant’s solicitor will review the lease and seek to negotiate the lease to make it as favourable for their tenant client as possible.

Although parties to a commercial lease are free to negotiate their own terms, attempts have been made to standardise commercial leases and you will often find that certain landlords, to include those of shopping centres and shopping parades, require their own, unadulterated form of lease for uniformity both for them, as landlords and for their tenants.

Documents Supplemental to Leases

Either at the commencement of the lease or over the lease lifetime the parties to the lease, or their successors, may require documents supporting the lease or varying the lease terms.

At the outset, for example, a landlord may require the tenant to provide a rent deposit as security for the tenant’s obligations under the lease.  A rent deposit is most often requested of tenants with limited or no assets such as newly incorporated companies.  The landlord will retain the rent deposit, usually a sum equivalent to three or six months’ rent, in a separate interest-bearing account.  The monies belong to the tenant unless and until the tenant defaults under the lease in which case the landlord can use the money to make good the default. A Rent Deposit Deed sets out the terms of this arrangement.

Commercial leases also usually contain restrictions preventing a tenant from transferring, selling or underletting the property without the consent of the landlord.  The process of applying for and documenting the consent is governed by the wording of the lease but you will generally require a Licence to Assign or Licence to Underlet.

Such documents are generally drafted by the landlord’s solicitor but in this latter instance, generally at the tenant’s cost.

On an assignment (transfer) of a lease, a landlord may also require a tenant to provide a guarantee in respect of the incoming tenant though an Authorised Guarantee Agreement (also known as an AGA) as a condition of granting consent to the assignment of the lease.

An AGA makes the outgoing tenant liable for the incoming tenant’s performance of the lease obligations and again, is particularly relevant for incoming tenants with an unproven history or little to no assets.

Similarly, leases usually contain restrictions preventing the tenant from altering the property or carrying out works to it without the consent of the landlord.

Consent for alterations are usually contained within a Licence to Alter/Licence for Alterations, and full details of the alterations and the obligations of the tenant regarding those alterations, should be clearly documented.

Leases can also be varied throughout the lease term or surrendered.  Any variation or surrender of the lease should be documented.  Verbal agreements between the parties are not sufficient.