How to enter into a commercial lease

Introduction

The main difference between a commercial lease (or "tenancy") and a residential lease is that the RESIDENTIAL TENANCIES ACT 1986 does not apply to commercial leases. Commercial leases are instead governed by the PROPERTY LAW ACT 1952. (For information on residential tenancies, see How to enter into a residential tenancy.)

With a lease the landlord is referred to as the "lessor" and the tenant is referred to as the "lessee".

What should be included in the lease agreement?

In order to be valid, a commercial lease must include the following elements:

• The lease must be for a time period that is certain, unless the lease is periodic (see below).
• The leased premises must be certain.
• The tenant must be granted the legal right of exclusive possession of the property.
• The lease must be properly created as a legal contract.

A lease will ordinarily be in writing, although this is not necessary for the lease to be valid. A written lease ensures that the parties know exactly what their rights and obligations are.

The parties are at liberty to negotiate specific terms in the lease agreement that suit their particular requirements. Because of the nature of commercial property and its uses, the parties may wish to provide in the agreement for issues such as ownership of fixtures and fittings and the intended uses of the property.

Periodic and fixed-term leases

An important distinction is between periodic and fixed-term leases. With a periodic lease there is no requirement for the beginning and end of the lease to be certain; instead, the lease ends on notice being given by either party. A fixed-term lease, on the other hand, requires a certain duration for the lease – that is, a certain starting and ending time.

If the lease agreement does not specify otherwise, a lease will be a monthly periodic lease, which means that either party can terminate it by one month’s notice in writing.

The landlord or tenant may be a company

Frequently one, if not both, of the parties to the lease will be a company. A landlord (lessor) may require a personal guarantee from a representative of the company, usually a director or major shareholder. The effect of this is that the guarantor will be personally liable for any amount owed by the company in the future.

The rights and obligations of the parties

The rights and obligations of the landlord and tenant are provided for in the PROPERTY LAW ACT 1952, and are implied by the law into all commercial leases. These include the following:

• The tenant (the lessee) must pay the rent when it is due under the lease.
• The tenant must keep the premises in good repair.
• The landlord (the lessor) is entitled to enter the premises at all reasonable times to view the state of repair. The landlord can serve the tenant with a notice requiring the tenant to repair any defect within a reasonable period of time specified in the notice.
• The landlord may re-enter the premises if the rent (or part of it) is in arrears for a period of 21 days. The landlord can also re-enter if the tenant has failed to perform or observe any of the terms of the lease. The landlord can exercise these rights to re-enter the premises either personally or through an agent. If the landlord does re-enter, this does not relieve the tenant of liability for the overdue rent or other breach.

Registration of leases

The parties have the option of protecting their interests by registering the lease on the Certificate of Title for the property.

Cautionary notes

• With commercial leases often very large amounts of money will be involved. Given the changeable nature of business life, it is very important that certainty is achieved as far as possible by providing in the lease agreement for any disputes or other difficulties that may arise.
• The rights and obligations that arise under commercial property law may lead to harsh consequences for one or other of the parties. It is therefore strongly recommended that in negotiating a lease you seek advice from a property lawyer who specialises in this area.