Entering into a new lease or taking an assignment of an existing lease can sometimes be a daunting task for business owners. There are a multitude of different areas that need to be addressed, in detail, in order to ensure that the lease fits the specific requirements of the business.
At Streten Masons Lawyers we act for a number of both tenants and landlord with both sides of the transaction often becoming bewildered with the leasing intricacies. Below are the answers to just a few commonly asked questions which may help in your understand of how leasing actually works and what certain terms mean.
1. What is the difference between a retail lease and a commercial lease?
Essentially there are two main types of leases, commercial leases and retail leases. The main difference between the two revolves around the actual type of activity or business being operated from the premises.
If the type of business being operated is contained in the schedule to the Retail Shop Leases Regulation 2006 (Qld) or it’s whole or predominate activity falls within the schedule, is a combination of activities listed in the schedule, or the premises is located within a retail shopping centre (provided conditions are met) then the provisions of the Retail Shop Leases Act 1994 (Qld) apply. Falling within the umbrella of the Retail Shop Leases Act places stringent requirements on both parties with reference to both disclosure obligations and strict requirements in relation the rights and obligations of both parties. The landlord in a Retail Shop Lease is further not permitted to pass on the legal costs associated with the preparation of the initial retail shop lease (however costs related to negotiating the lease may be passed on).
A commercial lease on the other hand, whilst other legislative provisions may apply, is not constrained by the Retail Shop Leases Act and does not require parties to disclose certain information is in a sense creates a looser field for which both parties can negotiate and operate the lease.
It is important to discuss with your solicitor the type of lease that you should be utilising, especially when you are looking at starting a new business.
2. What is the process to lease a shop in a centre instead of a building? Is there more documentation involved with it?
Typically a lease in a shopping centre will fall within the scope of the Retail Shop Leases Act which, as discussed above, requires disclosure to occur between both parties. A lease plan of a specific area within the shopping centre is usually also required, the cost of which may be passed onto the tenant.
3. What is a good period of time to have a lease for (1 year? 5 years?)
There is no specific period of time that a lease should be, however it is normally recommended that the lease include at least one option period after the expiry of the initial term. This grants the tenant the right to continue the lease for a further 3 years, for example, past their initial 3 year term. This allows for the tenant to ‘test’ out the business for a few years without committing to a long term lease. The difference in the total term of the lease also effects whether the lease should be registered on title so as to protect the tenant from losing the premises should the landlord sell the premises that is being leased. This is something that should be discussed with your solicitor when negotiating the terms of the lease.
4. What is the difference between a security deposit and a bank guarantee?
Often when entering into a lease the landlord will require some form of bond to secure the tenants obligations. This bond is then held by the landlord and only able to be utilised should a term of the lease be breached (provided certain preconditions are met).
There are two types of bond that can be given, a security deposit and a bank guarantee. A security deposit is a cash amount (usually a few months’ rent) that is held in the landlord’s bank account whereas a bank guarantee is an undertaking from a bank to make payment to the landlord up to a certain amount in the event of a default by the tenant.
5. What is a personal guarantee in the lease?
A personal guarantee is a guarantee provided by an individual to secure the obligations of the tenant (Guarantor). For example, where the tenant is a company the directors of that company may personally guarantee all of the company’s obligations under the lease. It creates a second recourse for the landlord to recover damages from the Guarantor in the event that default occurs.
6.How are rent increases handled?
Rental increases can occur a number of ways however most commonly are performed by means of a CPI increase (Consumer Price Index), a fixed percentage increase, or a market review.
A CPI increase references the relevant figure in a specific area (usually a few percent each year) and increases the rent by that margin. A fixed percent increase is a fixed amount determined between the parties and a market review is a review conducted by a third party to determine the current market rent to be applied. Often rent will increase by either CPI or by a fixed amount each year with a market review only taking place upon the exercise of an option for a further term.
7. What happens when a business is sold that is operating from a leased premises?
When a business is sold from a leased premises one of three things will occur:
1. The lease will be terminated and the new business owner will operate the business from another premises;
2. The lease will be assigned to the new owner (usually on the same terms); or
3. The lease will be surrendered and a new lease with the new owner will be negotiated with the landlord on new terms.
Choosing which option is best for the circumstances really depends on how the parties to the transaction would like to proceed and the costs involved with each option. The solicitors at Streten Masons Lawyers have extensive experience in advising clients in relation to a variety of different leasing matters from the establishment of the lease to a dispute. If you require any assistance please contact Rhennen at Rhennen@smslaw.com.au or call our us on (07) 3667 8966 to discuss your options.