Tenant Questions : My Lease

Introduction
A lease is an enforceable legal document that defines the rights and obligations of the Landlord (Lessor) and the Tenant (Lessee) for the leasing of commercial property.

It is imperative that prior to signing your lease that you have consulted with a:

  • Tenant Advocate who is skilled in advising on commercial premises and the market place and who can successfully negotiate all commercial terms to protect the current and future commercial position of your business and;
  • Solicitor who is skilled in preparing and negotiating the legal terms of your lease to protect the current and future legal position of your business.

Q. What is a Heads of Agreement?
A Heads of Agreement (HOA) is similar to a Memorandum of Understanding (MOU) in which both the Lessor and the Lessee enter into a formal agreement to specify the terms and conditions that have been discussed and agreed.

Generally or unless otherwise stated in writing, the HOA is non-binding on either the Lessor or the Lessee and is therefore not enforceable as a contract by one party against the other.

Q. What is the Net Lettable Area (NLA)?
This is the total quantum of space (Sqm) that you have agreed to lease from the Lessor. In all cases you should confirm that the NLA is correct through attaining a survey from a qualified surveying company. The survey document will identify the plan of your premises and the calculated NLA.

Q. How much space do I need?
The amount of commercial space a Lessee will require will depend on the structure of the company’s operations, current and future headcount and shared facilities (ie: IT, Communications, Breakouts, Storage requirements).

TRS provides a comprehensive space program that enables tenants to calculate how much space they need today and into the future. Lessees may also compare their space requirements against competing industries.

Q. What is the Lease Commencement Date?
This is the legal date on which your lease starts.

Q. What is the Rent Commencement Date?
This is the legal date on which your rent starts – it may differ from the Lease Commencement Date if you have negotiated a rent free period.

Q. What is the Lease Term?
This is the legal period of your lease depending on the negotiated lease term.

Q. What is an option to renew and how does it work?
An option is the Lessee’s opportunity to extend the existing lease by the term identified in the option clause within the lease document – this may be 1 to 15 years.

At approximately 6 to 12 months prior to your lease expiry you will be advised to provide notice to your existing Lessor that you either wish to renew your lease for the option period or vacate the premises.

Q. What is the Commencing or Starting Rental ($/Sqm p.a.)?
This is Gross or Net Rent that you agreed to pay over the Net Lettable Area from the Rent Commencement Date over the first year of the lease.

Q. What is a Rent Review?
The rent should be structured annually over the period of the lease term. The method of review may involve CPI or specified incremental (%) increases to the rent at the beginning of each year.

In some cases there may be a Market or Rent Review at the start of a specified year and this is where a Lessee is required to negotiate revised rental terms with the Lessor or their agent. There are several types of Market / Rent Review clauses:

  • Ratchet Upwards:
    This is where the rent cannot fall below the current passing rent at the time.
  • Cap and Collar:
    This is where you have previously negotiated that the rent may rise to a capped rate (specified) or fall below the current market to a collared rate (specified).

Q. What are Building Outgoings?
The outgoings include statutory costs (ie: land tax and rates) and expenses incurred by the Lessor for maintaining your building (ie: insurance, cleaning, building maintenance).

Lessees are responsible for paying outgoings and they apportioned in relation to the Net Lettable Area leased.

Q. What is Lessee Incentive and how is it structured?
An incentive may be provided to the Lessee by the Lessor. This is a quantum of money to assist towards the Lessee’s overall OPEX and CAPEX liabilities incurred during the course of the lease.

Lessee incentives are generally provided in one or a combination of three (3) structures:

  • Fit-Out Contribution
    Monies utilised towards the total cost of your new fit-out.
  • Rent Free
    Monies applied from the Lease Commencement Date over a select period of time (ie: 6 months rent free). Please note unless defined the Lessee may still be responsible for paying outgoings during the rent free period.
  • Rent Abatement
    Monies applied as a rental reduction against the Lessee’s total rent over a select period of the lease (ie: 2 years) or over the entire period of the lease.

Q. What is a Bank Guarantee and how much should I reserve?
Bank guarantees are required by the Lessor to protect their interests should a Lessee default in payment of the rent during the course of the lease.

At present many Lessors seek bank guarantees ranging between three (3) to twelve (12) months – this quantum and the structure of payment over the course of the lease is negotiable.

Lessors may also seek additional guarantees to cover a proportion of the total incentive provided – this quantum is negotiable.

Q. What is Make Good?
Prior to the expiration date of the lease the Lessee may be required to make good or reinstate the premises back to a pre-specified state. In most cases this will involve:

  • Removal of the Lessee’s fit-out
  • Reinstatement of the tenancy back to a base building condition including but not limited to mechanical and electrical works, ceiling tiles and paintwork
  • Removal of all redundant cabling

Q. Who pays for legal costs?
In preparing the lease document it is a common practice that the Lessee and Lessor are responsible for their own legal cost. Stamp duty is generally paid for by the Lessee.

Q. What is Assignment and Subleasing?
An assignment is the legal transfer of all lease and financial liabilities over a specified area of the leased property, in part or whole, to a third party Lessee. The original Lessee is not held liable by the Lessor once the lease is assigned to another Lessee.

A sublease to a new Lessee (known as a Sub-Lessee) remains under the original legal agreement of the original Lessee (known as the Head Lessee) who remains responsible to the Lessor for all lease and financial liabilities.

It should be noted that should a Lessee wish to assign or sublease their premises in part or whole that the Lessee must receive approval from the Lessor and that the assignee or sublessee may be required to offer the same or higher financial credentials and covenant capable of fulfilling the Lessee’s obligations.

In all cases the Lessor cannot unreasonably withhold approval.

Q. What is a Right of First refusal and how does it work?
TRS will negotiate a clause enabling the Lessee to attain a Right of First refusal over adjacent, adjoining or contiguous space. This means that at any given time and providing that the specified space is available (untenanted) the Lessee will be offered by the Lessor the Right to either lease the space or refuse it.