Understanding Your Rights As A Commercial Tenant In Australia

November 5, 2018 | Commercial Real Estate

Understanding your rights as a commercial tenant is important. In Australia, these rights will be outlined in your lease, and it’s vital that you get to know what they are and what they mean before you sign on the dotted line.

We’ve outlined a few things to keep in mind within this article. But, remember that no two leases are the same. So, if you’re unsure about anything, seek professional advice before making any commitments.

Rental Increases

Commercial leases usually include one of three methods for periodically calculating rental increases:

  1. CPI rent review – An increase based on the current consumer price index (CPI) rate is widely regarded as the fairest commercial rent review technique for tenants. However, landlords with high-demand properties are generally unwilling to settle on this method as it reduces their return on investment.
  2. Fixed percentage increase – A fixed percentage increase is an increase that is mutually agreed upon by you and your landlord before your lease is signed. A fixed percentage increase usually falls between 3-5% and is favoured by landlords because it is a relatively straightforward process that can seldom be disputed.
  3. Market rent review – If your lease is set to expire, and you have an option to renew, there’s generally a provision for your rent to be reviewed and adjusted to reflect current market rates. In this situation, be careful that your landlord doesn’t try to include a ‘ratchet’ clause in your lease, which prevents the rent from decreasing, even if market conditions warrant it. It’s in your best interests not to sign a commercial lease that has a ‘ratchet’ clause. If a ‘ratchet’ clause is proposed, negotiate to have it removed before you sign. Ratchet clauses are unlawful in retail leases.

You can learn more about how much rent you should be paying for your office space, here.

Do you have an upcoming lease expiry with an option to renew? Here’s why time is your friend.

Outgoings

Looking up at tall commercial buildings in Sydney

The term ‘outgoings’ is used to describe a landlords’ reasonable expenses associated with the running and maintenance of a commercial property.

If documented in the lease, an owner can pass these costs on to the tenant. So, make sure that you’re clear on what outgoings are your responsibility to pay from the get-go. As a rule, tenants are usually responsible for their own operating expenses (such as phone, electricity and internet), as well as for a portion of some of the landlord’s property expenses (such as council rates or taxes levied on the premises).

Ask your landlord for a full list of budgeted outgoings before you sign your lease. In other words, ask them for an itemised list of what expenses you’ll be responsible for and the estimated cost of each one to avoid any nasty “surprises” down the track.

It’s also important to understand the base year mechanism for calculating outgoings.

Bonds

Your landlord will usually ask for some sort of assurance to protect themselves against the risk of you defaulting on your commercial lease payments or damaging their property. This will generally come in the form of a refundable security deposit (e.g. cash) or a bank guarantee that you can arrange to provide to your landlord. Your landlord will have the right to claim all (or part) of your security deposit or redeem your bank guarantee if you breach the terms and conditions of your commercial lease.

Know that, as a commercial tenant, you can ask for an expiry date for a bank guarantee. This date is commonly set one year after your lease expiry and protects you against potential claims being made against you by your landlord long after your lease has expired. It also puts the onus on the landlord to raise any issues promptly.

Be sure that your contract provides for the timely refund of your security deposit once your lease expires, provided there are no issues on handover. If you’re a listed company, you may also be able to negotiate so that you aren’t required to provide a bond to your landlord.

Lease exit

Most commercial lease agreements will include a clause that allows you to sublease or assign your lease provided that you have your landlord’s prior written consent. But, if it doesn’t, it’s important to make sure you’re able to do this by negotiating it into your contract.

Make sure that this clause is not written in a way that favours your landlord. For example, the wording for such a clause should include that your landlord’s consent “should not be unreasonably withheld”, rather than having more vague wording such as the consent being “at your landlord’s discretion”.

Making good

“Making good” is a standard term in a commercial lease that requires a tenant to return a property at the end of a lease term in the same condition as it was in at the start.

Unless it has otherwise negotiated, you generally have the legal right to two options for making good:

  1. Making a cash payment to your landlord at the end of your lease for them to complete the necessary “make good”work.
  2. Arranging for a contractor of your own choice to complete the necessary “make good” work.

It’s also vital that there is a dispute resolution procedure in place in your lease to prevent any disagreements over what is necessary to “make good”. Where possible, obtain a dilapidation report at lease commencement to document any pre-existing damage to the property and to protect yourself.

You can read more about reducing your risks around making good here.

Repairs and maintenance

Repairs and maintenance – for example, cleaning the premises or issues pertaining to your fit-out – are generally a tenant’s responsibility. However, the landlord is typically responsible for mending any structural problems (e.g. wall cracks) with the premises, as well as any repairs and maintenance to capital items such as air conditioning systems or other plant and equipment assets.

Note: Often, the landlord will have a preferred HVAC (air conditioning) service provider. As a tenant, you have the right to use another provider. However, you will be liable for the dilapidation period and warranty maintenance on additional equipment installed.

How can Tenant CS help you …

Tenant CS is a commercial tenant advisory service that offers tenant representation services for businesses across Australia.

We represent tenants and give our clients a competitive advantage when it comes to finding a space, and negotiating terms, tenant incentives, exit strategies and more!

Need help with your next commercial real estate project? Get in touch with our team today!

Need more convincing? Read our seven reasons to appoint a tenant rep.

About to sign a commercial lease? Dot your i’s and cross your t’s by reading through this checklist before you sign!

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The Author

Francois is a highly skilled tenant representation specialist, who brings a wealth of experience across various real estate markets.

Part of the tenant representation Sydney team, Francois has a Masters in the Science of Management from Montpellier Business School (France) and a Bachelor (Hons) in Business Studies from De Montfort University (UK).

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