Landlords must protect their legal and commercial interests in property. The best way to do this from a contractual perspective is to include any particularly important special provision (i.e., a “special consideration”) in the lease. If you don’t ask for it, you won’t get it.
What these special considerations should be will depend on the property, the market within which the tenancy takes place, and the particular tenant.
You should also be prepared for your commercial tenant to ask for special considerations. This is a two-way street. Commercial leases contracts are often subject to far more negotiation than residential leases, so you and your attorney should consider in advance what kind of special requests from a prospective tenant might be acceptable.
Examples of special conditions in commercial leases
Some of the special conditions commonly found in commercial leases include:
- Make good provisions. If the tenant makes physical changes to the space – adding counters, painting it purple – landlords frequently require that the space is restored to its original condition (usually at the tenant’s expense) at the end of the tenancy.
- Outgoings. These may include utilities, council rates, taxes and other building costs. It is advisable to specify who is to be responsible for each.
- Air conditioning. Tenants are often responsible for this cost, however, it is important to be explicit.
- Conditional provisions. These might include council approval or the granting of a liquor license. If these conditions are essential to the tenant’s success, the landlord may want to retain the right to cancel the lease if the conditions fail.
- Warranties. Landlords should consider the need to protect themselves from conditions beyond their control. An example often given is internet service. Landlords should ensure that they will not be held responsible for the existence or quality of internet service or changes in law or any other factor important to the tenant but out a landlord’s control.
- Early termination. A landlord may want to preserve the right to end the lease early for a variety of reasons, including adverse experience with a tenant or the sale of a property.
What the tenant may ask for
- The flip side of “make good” requirements are special agreements for “fitting out.” A tenant may ask that the landlord shoulder some of the cost of making a space suitable for a particular use. Depending on the attractiveness of a particular tenant or long-range plans for the property, this might be economically worthwhile.
- A longer term, an option to renew, or even a right of first refusal should the property be sold. As a rule of thumb, tenants look for a longer term and greater stability with less frequent potential for rent increases. Landlords generally look for a shorter term, but there can be sensible reasons to vary this.
- Exclusivity of trade. A tenant may want to ensure that no other tenant in a shopping centre would be in direct competition and may consequently ask for exclusivity of trade clause.
- Anchor tenants. Conversely, a tenant may want to ensure that the lease can be broken or re-negotiated if the mix of tenants in the centre makes a particular space less desirable because of loss of foot traffic or a change in clientele. A fine French restaurant may not do as well when surrounded by auto parts stores than it had when the neighbours were upscale retailers.
- Security bond. Tenants typically post a security bond, to be held in an interest-bearing account at the beginning of a lease. Tenants will likely prefer a smaller bond, landlords a larger one.
- Assignment and subleasing. Should the tenant be permitted to do either? As with many other provisions, it is best to be explicit.
As the landlord, including special conditions in your lease, can do three important things: protect your property during the term of the lease, tailor it to the market within which the transaction takes place and perhaps even make it more attractive to a desirable tenant.
If you are considering leasing property to a commercial tenant, or are wondering how to negotiate a commercial lease agreement, the attorneys at Owen Hodge Lawyers would be happy to help you draft a lease that will protect your interest. We can also help you look ahead to anticipate the special considerations for which a prospective tenant may ask. Please call us to schedule a consultation at 1800 770 780.