What to check before signing a commercial lease

A commercial lease is a major commitment, often for years, with real money at stake. Problems are far cheaper to fix before you sign than after. This guide covers the key things to check.

Does the Retail Leases Act apply

The first question is whether your lease is a retail lease. If the premises are used for a retail business, the Retail Leases Act 1994 (NSW) is likely to apply. That Act gives tenants extra protections that do not apply to ordinary commercial leases, so it matters which set of rules governs your lease.

The disclosure statement

If the Retail Leases Act applies, the landlord must give you a disclosure statement before you enter the lease. It must be given at least 7 days before the lease is entered into. The disclosure statement sets out key terms like the rent, the outgoings, and the permitted use.

Check the disclosure statement carefully against the lease. If it is missing, late, or wrong, you may have rights, so raise it before you sign. Within 7 days of receiving the landlord's statement, a tenant must usually provide a tenant's disclosure statement or ask for an extension.

Term and options

Check how long the lease runs and whether you have options to renew. An option gives you the right to extend for a further term, which protects the goodwill you build in the location. Note the deadline to exercise an option, because missing it can cost you the renewal.

There is no longer a minimum 5-year term for retail leases in NSW, so a lease can be for a shorter period. Make sure the term you agree to suits your plans for the business.

Rent and rent reviews

Check the starting rent and, just as importantly, how it is reviewed. Rent reviews can be by a fixed percentage, by CPI, to market, or by another method. A fixed percentage gives certainty. A market review can move sharply. Make sure you understand what you are agreeing to over the whole term.

Outgoings

Outgoings are the building running costs the landlord may pass on to you, such as council rates, water, insurance, and management. Check which outgoings you are liable for and how they are calculated. Unexpected outgoings can turn a good deal into a poor one.

Permitted use

Check that the permitted use in the lease matches what you actually intend to do, and allows room to grow. If the use is too narrow, you may be in breach if your business changes. Confirm that the use is also allowed under the relevant planning rules.

Make good

Make good is your obligation to return the premises to a set condition at the end of the lease. It can be expensive. Check exactly what is required, take photos of the condition at the start, and negotiate the clause if it is unreasonable.

Assignment and security

Check whether you can assign or sublet the lease if you sell the business or need to move on, and what the landlord can require. Check the security as well, such as a bank guarantee or personal guarantee, and how and when it is returned.

Registration

A retail lease for a term of more than 3 years, including any option terms, generally needs to be registered. Registration protects your interest in the land. Make sure the lease deals with who registers it and who pays.

Resolving a dispute

If a retail lease dispute arises, it is often dealt with through the NSW Small Business Commissioner and, if it cannot be resolved, the NSW Civil and Administrative Tribunal. Getting advice early usually gives you more options.

Frequently asked questions

What is the difference between a retail lease and a commercial lease? A retail lease is for premises used for a retail business and is covered by the Retail Leases Act, which gives tenants extra protections. Other commercial leases are not covered by that Act.

What is a disclosure statement? A document the landlord must give a retail tenant before the lease, setting out key terms. It must be given at least 7 days before the lease.

Can I get out of a commercial lease early? Only if the lease allows it, or if you can assign it, or the landlord agrees. This is why the assignment clause matters.

Should I have a lawyer review the lease? Yes. A review before you sign is far cheaper than fixing a problem later, and a lawyer can negotiate the terms that matter most to you.

Keep reading

• Commercial leasing
• Retail Leases Act NSW: a tenant's guide
• Make good clauses: what commercial tenants need to know

This article contains general information only and is not legal advice. For advice about your situation, please contact us. Liability limited by a scheme approved under Professional Standards Legislation.