Are you thinking about leasing a shopfront or a commercial space? Here are a few key terms that will become useful for you to know when you’re out looking for a place and dealing with property agents.
This list of commercial lease terms is intended to give you an overview of terms and their general meanings within the leasing industry. You should obtain legal advice to help navigate entering into any commercial lease transaction.
- Bank Guarantee: a formal assurance by a bank that a sum of money will be paid to the landlord if the tenant does not fulfil the specified obligations under the lease, defaults under the lease or otherwise breaches a term of the lease.
The bank guarantee amount is usually amount of the security deposit required under the lease and issued as an A4 sheet of paper signed by the bank.
- Common Areas: refers to those parts or areas of a building or on a land that can be used by all tenants in common and where no one tenant has exclusive use of that area. For example, carparks, hallways or public restrooms.
- Default: the failure to fulfil an obligation, do a thing or meet a requirement under the terms of the lease. Both the landlord and the tenant can be in default under a lease.
- Fit-out: a process undertaken by the tenant to install fixtures and fitting in a premises. The tenant usually pays for their fit-out expenses.
- Gross Lease: is a lease where the tenant pays a base rent amount and does not contribute to extra charges for outgoings or expenses accrued for the property. For example, the base rent amount would incorporate a buffer for property payments such as land tax, council rates, water rates, insurance, management fees etc.
- Lessor: also known as landlord. This is the person granting the lease and the owner of the property.
- Lessor’s Works: also known as Landlord’s Works. This is the process whereby the landlord incurs costs of preparing the premises for the tenant’s fit-out. The tenant may have pay for the landlord’s works.
- Lessee: also known as tenant. This is the person who occupies the premises under a lease granted by the landlord.
- Make Good: usually refers to a clause within a lease which outlines the obligations imposed on a tenant at the end of their lease and how they are required to lease the premises when moving out. The tenant is typically required to return the premises to its original conditions (but not always).
- Net Lease: is a lease where the tenant pays a base rent amount plus they contribute to the payment of outgoings or expenses related to the property. The contribution is sometimes calculated as a proportionate percentage in respect to the total lettable area of the building or land. For example, it is usually a base rent amount plus outgoings for the property such as land tax, council rates, water rates, insurance, management fees etc.
- Outgoings: a general term to describe the landlord’s expenses incurred in running and maintain a commercial property. These expenses are outside the base rent amount and which the landlord is seeking recovery from the tenant for paying. For example, typical outgoings would include land tax, council rates, water rates, insurance, management fees etc.
- Personal Guarantee: is a personal guarantee from directors and/or shareholders of a company that the obligations of the lease will be fulfilled by the tenant. If the tenant is not a company, then a landlord may request a personal guarantee from a spouse, parent or another person. We highly recommend that any person providing a personal guarantee should seek independent legal and financial advice.
- Permitted Use: the tenant’s permitted use of the premises which allows a tenant to do all the activities required to operate their business. This includes all the types of goods they want to sell and/or the services they wish to provide.
- Rent: your rent payments, which are usually displayed as an annual rent amount, but broken down into monthly payments.
- Security Deposit: a form of security given by a tenant to a landlord in order to protect the landlord should a tenant default under a lease. The security deposit is usually returned to the tenant at the end of the lease and after the tenant completes its make good of the premises. A security deposit can come in a variety of forms including (but not limited to) a bank guarantee, cash deposit, personal guarantee or corporate guarantee.
- Sub-lease: a sub-lease is an agreement between the landlord and tenant to allow a third party to use all or part of the tenant’s lease area. Typically, you must obtain the landlord’s consent prior to subleasing any part of a premises.
- Term: is the period of time that you’re are allowed to occupy the lease area.
- Termination: is how the lease can be terminated by either the landlord or the tenant and what notice must be given by either party.
- Options: is the optional period of time that a tenant can choose to extend their lease by after a term has ended. There are typically strict requirements for a tenant to exercise an option to renew the lease. Strict time limits may apply concerning the service of notices on the other party.
- Permitted Use: a term that describes the tenant’s use of the premises and what activities are approved within the premises.
- Premises: also known as the lease area. It is usually a defined term in a lease and details the area that is being occupied by a tenant. This will generally be referring to a part of a building, whole of the building on the land or whole of the land including the building.
Retail Lease Specific Terms
- Lessor Disclosure Statement: Is a statement given by a landlord to a tenant which contains key information about the retail shop, the terms of the lease and the tenant’s financial obligations. A lessor disclosure statement is typically required by law. In NSW, QLD and WA, the disclosure statement must be provided to a tenant at least seven days before the tenant signs or enters into the lease.
- Lessee Disclosure Documents: Is a statement given by the tenant to a landlord which contains information about the tenant, its business history and may include providing additional documents to the landlord such as a Legal Advice Report signed by a lawyer and a Financial Advice Report signed by an accountant.