February 2019

Commercial leases – tips and traps for tenants

This article was published by Hire and Rental News, February 2019, Page 23.

Leases place onerous obligations on tenants and are typically drafted to favour a landlord. Tenants of retail leases are afforded some protection by the Retail Leases Act 1994. However, there is no similar legislation for tenants occupying commercial or industrial premises.

Agreeing to the commercial terms of a lease, such as the term, rent, rent reviews etc, is only the first step. The fine print of any lease should then be reviewed to determine whether amendments are required to protect a tenant against some of the more “landlord friendly” clauses.

Set out below are some tips and traps for tenants to consider before signing a lease:

  • Agreement for lease - before a lease is prepared and submitted to a tenant, it is common for landlords to require tenants to enter into a Heads of Agreement, also known as a Heads of Terms, Term Sheet or Proposal. Tenants should ensure that any Heads of Agreement is expressly stated not to be binding or is subject to the tenant approving and signing a formal lease document. Otherwise, a tenant may unknowingly enter into a binding agreement for lease before any formal lease is signed and will be unable to withdraw from the lease negotiations.

  • Market rent reviews – it is common for leases to state that on any market rent review of the rent, the rent will not be less than the amount payable immediately before the review date. These are known as ratchet clauses and unless the parties have knowingly agreed otherwise, the tenant should try to have them deleted from a lease. A true market review of the rent will allow the rent to increase or decrease. Also, provisions which require valuers when determining market rent to disregard incentives provided by landlords to tenants should be resisted.

  • Release and indemnities - clauses which require a tenant to release a landlord from and indemnify a landlord against claims, damages and loss need careful consideration. Often these clauses require a tenant to indemnify a landlord beyond the tenant’s liability at common law. For that reason, a tenant must be satisfied its insurance policies will cover the risk it assumes under the lease. The clauses should also be considered to ensure a tenant is only liable for claims that arise from the premises and that it is not liable for claims that arise because of the landlord’s own negligence or default.

  • Payments for structural repairs – often the repair and make good clauses in a lease will require a tenant to be responsible for structural repairs and capital costs. Any provision which places an obligation on a tenant to repair the premises, comply with laws relating to the premises or even payment of outgoings should expressly exclude the tenant being liable for carrying out or paying the costs of structural repairs or capital costs.

  • Outgoings – tenants should make sure whether they will be required to pay for outgoings and if so, what type of outgoings will be payable. An itemised estimate of outgoings should be obtained, and tenant’s may wish to negotiate an agreed cap on the amount of outgoings payable.

  • Assignment – usually a lease will permit a tenant to assign the lease to a third party. However, the tenant will not be released from its obligations under the lease unless the release is expressly stated in the lease or subsequently agreed to by the landlord. If the landlord does not agree to release the tenant, the tenant guarantees the new tenant’s performance of the lease until expiry. A tenant may wish to negotiate that it and any guarantors are released from the obligations under the lease from the date the lease is assigned, however landlords are normally reluctant to agree to this.

  • Option leases – the period of time during which a tenant may exercise an option for a further lease must be strictly adhered to. Failure to exercise the option in accordance with the terms of the lease may mean the landlord is not obliged to grant the further lease. Further, tenants are often required to exercise an option to renew a lease before they know the amount of the new rent payable under that lease. Consideration should be given to amending the lease so that the landlord and tenant are obliged to agree to the new rent before the tenant must elect whether to exercise an option to renew.

  • Landlord’s obligation to repair – leases usually do not place any obligations on a landlord to keep a property in good repair or waterproof and watertight. Unless there is a specific obligation in a lease, a tenant may find it difficult to require a landlord to fix an annoying leak or carry out other repairs.

  • Quiet enjoyment – leases will usually state that a tenant may use the premises without interruption by the landlord, except for any particular rights a landlord has reserved for itself in the lease such as a right of entry to inspect the state of repair of the premises. If the premises form part of a building or complex which the landlord owns and leases to other parties, the obligation on the landlord should extend to the landlord ensuring that its other tenants also do not interfere with the use of the premises.

  • Make good – the tenant’s obligation to make good the premises at the end of a lease is often the source of disputes. Tenants should make sure that their make good obligations are understood and clearly stated in both the heads of agreement and the lease. It is not uncommon for landlords to require tenants to repaint premises regularly throughout the term, say every 3 years. The tenant should consider whether it agrees to do this or whether repainting should form part of its make good obligation only.

Finally, it is important that any agreement made during the term of the lease, such as to vary the terms of the lease, is formally documented. An oral agreement or exchange of emails may not be enough to require a landlord to abide by any subsequent agreement or variation, especially if the premises are subsequently sold to a third party.

Author:  Melissa Potter