14 Things to Consider Before Leasing Your Commercial Property

Renting out your commercial property is a huge investment decision, and a commercial lease can be complex and fraught with potential problems. So before you start leasing your commercial property, it’s important to know your legal rights and responsibilities.

To take charge of your commercial investment and start reaping huge financial rewards, here are some things you need to keep in mind:

Ask these questions

As you start out, you should ask yourself the following questions:

• Is the property ready to be leased?
• Who am I intending to lease to?
• How much and how long am I leasing the property for?
• Will I allow the lease to be renewed?
• Do I have a solid lease agreement for my type of property?
• Can I do a background and credit check on prospective tenants?
• Do I have a support team (contractor, electrician, plumber, cleaner, landscaper, bookkeeper and solicitor) on standby?

2. Setting the terms

Draw up the commercial terms of the lease in a ‘Heads of Agreement’ document to be signed by yourself and the tenant. The purpose of this document is to record the proposed terms of the lease agreed by both parties. Although not legally binding, the agreement should hopefully discourage the tenant from requesting any alterations to the lease in the future.

3. Preparing and understanding the lease

Hire a lawyer with commercial lease experience to prepare the lease to ensure that the deal runs smoothly. When drawing up the lease, you’ll need to consult your financier if there’s a mortgage over the property, your architect or builder if building works are required, and your property manager or agent to ensure that the commercial terms included in the documents are appropriate.

A commercial property lease sets out the rights and obligations of the owner (landlord or lessor) and a third party who’s agreed to occupy the property (tenant or lessee). A tenant must comply with the lease terms, and if they don’t, you can terminate the lease and seek damages against the tenant.

The lease is usually for a specified period of time, generally for more than 3 years (including options to renew). The tenant is obliged to pay the rent for the duration of the lease even if they leave the premises. If they don’t leave the premises and the initial period ends, the tenant has the right to renew the lease for a further specified period.

For a new commercial lease you are legally required to give the tenant a written lease that contains the matters agreed upon and signed off by both parties, a copy of the proposed lease when the lease negotiations begin and a disclosure statement.

4. Highlighting tenant obligations

In the lease documents, the tenant’s obligations must be clearly highlighted, including expectations regarding payment, environmental disturbances, parking, pets (if allowed), maintenance, and so on. If the tenant chooses to undertake any fit-out works, they should get approval from you and the local council.

5. Items for negotiation in the lease

The following items must be negotiated between you and the tenant and included in the lease documents:

• Rental payments (the amount, and when and how to pay)
• Start date of rent period
• Outgoings payable by the tenant and landlord
• Lease term
• Renewal options, and how and when to exercise the option
• Maintenance and repairs
• Use of the premises
• Sub-letting all or part of the premises, and under what conditions
• Insurances required
• Tenant and landlord obligations at the end of the lease.

6. Hiring an experienced property manager

Hire an experienced property manager to handle your property and your tenants to give you peace of mind and assurance that everything is well-maintained. The property manager must conduct property inspections at least twice a year and deal with tenant issues.

7. Carrying out pre-lease inspections

Carry out a pre-lease inspection of your property and note down the condition of the premises before commencing the lease. Have service agreements in place for the intercom, lifts, air conditioning, and other mechanical services of the building, and ensure that they’re maintained properly.

8. Developing business systems

Renting out your commercial property is like running a business – you have tenants as your customers and the premises you’re leasing as your inventory. Plus, there’s a substantial exchange of money between you and your tenants. To successfully manage your property, you should develop the following basic business systems:

• An accounting system to handle the cash flowing in and out.
• A sales and marketing system to handle the selling and advertising of your property.
• An operations system to keep track of all the legal requirements of operating your property.
• A maintenance system to ensure your property is in good working order.

9. Finding tenants

Finding the right tenant can be a difficult task, so enlisting the help of a property manager can be a great help. Property managers can assist you with screening tenants as well as determining rent prices.

Finding a tenant

• Create a list of potential tenants to target. This may be compiled according to geographic location (best suited for industrial property) or by business type (businesses you feel your property would ideally suit).
• Once you have established your list of potential tenants to target, establish who you will need to speak to in regards to property decision making. Will it be the office manager? Finance? The CEO? Rehearse your cold call and sales pitch.

Once you’ve chosen a tenant:

• Industry outlook: Research the tenant’s industry to assess its future outlook. Is the industry outdated, stable or booming? If a tenant is in an industry that is outdated, this could mean a future drop in revenue which isn’t a good sign.
• Tenant history: Past tenant behaviour is indicative of their behaviour in the future. Look at things such as timeliness in paying rent, attending to maintenance issues and whether their bond was returned in full.
• Current location: Assess where the tenant is currently located. Is your spot more conducive to their business model? Make sure to ask the tenant why they are moving as the reason may have something to do with revenue loss.
• Security and bond: A security and bond is necessary to protect yourself if the tenant goes into arrears with payments. Seek the assistance of an agent when determining this amount as it can be complex – if you take too much capital out of their business that could be damaging to them, but at the same time the amount needs to be sufficient enough to protect yourself.

10. Security bond

As mentioned above, you can seek security from a tenant to protect you against the default of the tenant not following their lease obligations, such as not paying rent. The security can be an amount equal to 3-6 months of rent by way of cash deposit or bank guarantee (from an individual tenant) or a personal guarantee (from a company’s directors or shareholders).

11. Rent payments

The rent for the initial period and any rent review or change in the rent should be specified in the lease. Ensure that your tenants make rent payments on time. Don’t accept late payments as this could cause cash-flow problems. You may charge interest on any late rent payment.

12. Other outgoings payable by the tenant

In addition to rent, your tenants should pay for:

• The telephone, electricity and gas
• Council and water rates
• Stamp duty
• Building and contents insurance
• Public liability insurance
• Plate glass insurance
• Half the cost of preparing the lease documents.

13. Repairs and maintenance

If a tenant causes damage to your property during the lease term, they’re responsible for the repairs. However, this doesn’t apply to structural repairs. A tenant is also responsible for maintenance to the property, but this doesn’t include capital items, such as air conditioning, and the landlord’s plant and equipment. When a lease ends, a tenant must leave the property in the same condition it was in at the start of the lease. This doesn’t apply to deterioration caused by ordinary wear and tear.

14. Altering the premises

If a tenant wishes to make any alterations to the premises, whether it’s big or small, they must obtain written permission from you. If a tenant installs fixtures that are classified as trade fixtures, you may ask to have them removed at the end of the lease. Before installing any fixtures, a tenant must have written agreement on this from you.

Now that you know what to expect and what you must do, you can ensure the successful leasing of your commercial property.