Common pitfalls in a commercial lease
A commercial lease is a contract between a landlord and a tenant, who has the right to occupy the property like an office or a warehouse. Commercial leases differ from retail leases because they have different regulatory frameworks. Unlike retail leases, commercial leases are not as tightly regulated which means that parties of a commercial leases have more flexibility to negotiate terms. The legal jargon used in commercial leases can be difficult to understand and there are a few terms that often trigger disputes between landlords and tenants. This article will cover clauses on option to renew, rent review and repair and maintenance.
Option to renew
After you determine the term of the lease, the starting date and the terminating date, you may want to consider the ‘option to renew’ clause. The option is the tenant’s right to demand another fixed term of the lease on the same terms as the existing lease (except for the rent and duration). For example, a five-year lease may have a five-year option, making the total duration ten years if the tenant chooses to exercise the option.
Without an option to renew, the landlord has two options at the end of the term: either offer the premises to the same tenant on different terms and conditions or offer the premises to a different tenant.
It is often in the interests of both parties to include this term if they want to maintain a long-term commercial relationship. The landlord will have more financial security and a more valuable property. Conversely, the tenant benefits from building a strong reputation and goodwill by maintaining the same location for their business.
If an option to renew clause is inserted, the duration of the new terms should be sufficiently long and the preconditions of an option for renewal should be clearly outlined. Examples of preconditions include: ‘that the tenant must have punctually paid rent throughout the lease term’, and ‘that there is no subsisting breach of any lease covenants by the tenant at the date of serving notice of exercise of the option’.
The next term that all landlords and tenants should consider is the rent review clause. There are various ways to review rent such as by a fixed percentage, by movements in the Consumer Price Index (CPI) and by market rent. Landlords and tenants should be aware of any ‘ratchet’ clause in the lease as it can give rise to considerable problems in lease drafting and litigation. A ratchet clause prevents the rent to reduce after market rent review. Hence, inserting a ratchet clause is in the landlord’s interest.
Repairs and maintenance
Clauses pertaining to repairs and maintenance are often disputed because parties do not clearly specify who is responsible for repairing or maintaining certain items in the premises. The exact obligations for repairs will usually differ with each lease. Generally, if the damage to the property is beyond fair wear and tear, the tenant has the responsibility pay for the cost of repairs. A large hole in the wall is an example of beyond fair wear and tear. The landlord is normally responsible for repairing the roof, the ceiling, the external walls and the floors of the property.
Therefore, landlords and tenants need to be alert to certain terms in a commercial lease otherwise costly disputes can arise. If you want to enter into a commercial lease, get in touch with our experienced legal team so that we can review your lease and protect your interests.