The majority of businesses on the Sunshine Coast operate from leased premises. After wages, the costs associated with leasing are the most significant costs incurred by a business owner, however it is not uncommon for business tenants, and landlords alike, to have some misconceptions about the rights and obligations that leasing creates.

It is vital for any person considering entering into a commercial or retail shop lease, as either a landlord or a tenant, to obtain specialist advice prior to signing a lease document.

The following is a brief overview of some of the issues to be considered by both landlords and tenants when entering into a leasing relationship.

What is a lease?

A lease is a contractual agreement between the owner of the premises (the landlord) and a person or entity who occupies the premises for a period of time (the tenant). The lease document sets out the important elements of the leasing arrangement and specifies the rights and obligations of the respective parties.

What is the difference between a Commercial Lease and a Retail Shop Lease?

Queensland, and most other States, has passed legislation that deals specifically with issues relating to the lease of retail shop premises. The purpose of the Retail Shop Leases Act is to define particular rights and obligations owing by landlords and tenants, and in particular to ensure greater protection for tenants in large retail shopping centres by requiring mandatory minimum standards for leases.

A retail shop lease arises where the premises is located within a complex including a certain number of other retail shops, or when the use of the leased premises is one that is specifically listed by the legislation.

A commercial lease is a lease for business purposes that does not fall under the Retail Shop Leases Act and which is not subject to the mandatory minimum standards.

To determine whether a lease fall within the scope of the Retail Shop Leases Act, you should seek legal advice.

Important elements of a lease

The following are some of the important issues that should be contained within a lease and which the prospective parties should be aware of prior to committing to a lease:-

• The start and duration of the lease;
• Whether there are any options to renew or extend the lease;
• The permitted use of the premises under the lease and whether this is adequate to cover the intended business and any future expansion;
• The rent and outgoings payable under the lease;
• How the rent will be reviewed during the lease and any options;
• The insurance required under the lease and the party responsible for the costs of insuring;
• Whether a bond or bank guarantee is required to be provided;
• If the tenant under the lease is a company, whether directors guarantees will be required;
• The costs of preparing the lease and who will be paying these;
• Registration of the lease;
• The items or services that are included in the lease, for example, air conditioning,
• Obligations at the end of the lease including repair and redecoration of the premises;
• The consequences of not complying with the lease or failing to pay rent or other payments.

Protection for landlords

When entering into a lease as a landlord, it is crucial to ensure that the lease document provides adequate protection measures and caters for the potential default of the tenant.

If a tenant fails to pay rent or outgoings under the lease, a landlord may suffer significant financial loss. Additionally loss can be suffered if a tenant damages premises or vacates without returning the premises to its original condition.

An effective method of security for a landlord is the requirement that a tenant provide a bank guarantee at the commencement of the lease. Bank guarantees are payable on demand by the issuing financial institution to the person named in the guarantee and are therefore an invaluable security in the event of a defaulting tenant.

A landlord should also ensure that adequate provision is made for the “making good” of the premises at the termination of the lease by requiring the tenant to remove all fixtures and fittings and return the premises to their original condition. A well-drafted “make good” clause in the lease assists in the smooth transition from one tenant to a new tenant and helps to ensure that the premises remain tenanted.

Protection for tenants

As a tenant it is important to ensure that a prospective lease is affordable and is appropriate for the type of business to be carried on. It is crucial to consider the length of the term and any options to extend the term in conjunction with a tenant’s business plan.

The rent and outgoings must be affordable and the tenant should take into account the provisions detailing rent increases throughout the term.

If, as a tenant, your business will be expanding or evolving, it is important to consider the permitted use of the premises and whether this will cater for these business changes.

Obtaining legal advice

The above checklist and essential terms are not by any means an exhaustive list of issues that need to be addressed in a commercial or retail shop lease. It is imperative that any person considering entering into a lease obtain expert legal advice to ensure that the lease meets their individual needs.