A commercial lease is a (tenancy) contract between a tenant and a landlord, setting out the conduct and obligations of both parties. A commercial lease clearly sets out the terms and conditions of the tenancy, and most tenant protections are incorporated into the clauses of the lease agreement. When renewing a commercial lease or entering into a new one, it is very important to understand what the lease contains and to know how to secure terms most favourable to yourself. For small business owners, a common issue is that a shop lease is about to expire, but they may not plan to renew — so what should be done next?
This article will systematically explain, based on the situation where a commercial lease is expiring: in NSW, if a commercial lease will not be renewed, what the law requires the landlord (lessor) to do, and what rights a tenant has if the landlord fails to comply with the legally prescribed notice requirements.
The Landlord’s Obligation to Give Notice—
Under the NSW Retail Leases Act, when a commercial lease is about to expire, if the landlord intends to renew, or wants the tenant to move out at the end of the term, the landlord is obliged to give the tenant written notice that the lease is about to end.
Under the rules, the landlord must give written notice (Lessor’s Notice) at least 6 months before the lease expires. For short-term leases of less than 12 months, the landlord’s notice period is 3 to 6 months before the end of the lease.
If the landlord fails to give the tenant written notice, then the tenant’s lease will automatically be extended by operation of law, with the new expiry date being 6 months from the date of the landlord’s notice. The tenant has the right to terminate the lease at any time within this 6-month period, but must give the landlord at least one month’s prior written notice.
During this extended period of the commercial tenant’s lease, under the rules, the landlord must not publicly advertise the premises for lease, except in the following circumstances:
- the landlord has offered the tenant a renewal or extension of the lease, but the tenant has not accepted;
- the landlord has notified the tenant in writing that it does not intend to renew or extend the lease, so the tenant has no right to continue using the premises;
- the tenant has notified the landlord in writing that it does not wish to enter into negotiations to renew or extend the current commercial lease.
Matters for Tenants to Note When Returning the Premises—
When the commercial lease expires, if the landlord has given written notice in advance, under the rules, the tenant must reinstate and return the premises in accordance with the terms agreed in the lease.
The landlord may allow the tenant to leave items at the premises, or to pay a sum of cash, in lieu of the obligation to reinstate the premises. Whichever approach is used, the tenant needs to confirm in writing the landlord’s requirements at the expiry of the commercial lease.
If the tenant previously provided a bond or bank guarantee but the landlord has not returned it on time, the tenant should request the return of the security deposit or bank guarantee within a reasonable time after the expiry of the commercial lease (if the lease does not specify this timeframe).
The Tenant’s Obligation to Restore the Premises to Their Original State—
Usually, the tenant will be required to “make good” the property before handing the keys back to the landlord. Make good is a clause appearing in most commercial lease agreements, requiring the tenant to ensure that the premises are returned to the landlord in the same condition as when the landlord let them. Generally, these commercial lease clauses apply to commercial tenancies where the tenant rents an entire building or plans to alter the existing fit-out.
As for “make good” clauses, many times there is no clear specification, and they may often not be explicitly spelt out in the lease. Even if the commercial lease does not include such a clause, if the premises are not restored to their original state at the end of the lease, the landlord can still take legal action under Common Law principles.
Make good clauses are sometimes drafted very clearly, but sometimes have loopholes and exceptions. The best practice is to have a lawyer review the clause before signing the agreement, or, better still, to have a lawyer draft the clause from scratch, making it clearer and more reasonable and tailored to the particular circumstances and the specific premises.
A small tip is that, when a tenant makes any changes to the premises, they should list any alterations already made or planned. These alterations may include the installation of any of the following fixtures or equipment:
- heating or air conditioning
- blinds and curtains
- flooring
- fittings
- partition walls
- power points/lights
- signage
After recording all changes made, the tenant needs to negotiate with the landlord to reach a mutual understanding between tenant and landlord. If the landlord considers that these changes amount to improvements or renovations to the property, then in that case the tenant may not have to pay for those changes.
Final Thoughts
A commercial lease is an important long-term business contract between an owner and a tenant. Because the terms of a commercial lease are drafted to suit the circumstances of the owner and the tenant, there is no so-called “standard version”, so every owner and tenant should ensure that the lease meets their particular needs. An inappropriate lease can cause financial problems for the tenant or property problems for the owner, and may even make the property unsellable, whereas a good lease can spare the tenant unnecessary effort on leasing issues, and reasonable restraints on the tenant can also help the owner enhance the value of the property, achieving a win-win outcome for both owner and tenant. The terms of a commercial lease affect the rights of both tenant and owner; we recommend that, when drafting a commercial lease, whether the lease is ordinary or special, professional advice should be obtained. Tenants should engage a professional lawyer to consider the overall position and help secure the best lease terms for you; at the same time, when drafting the contract it is also recommended that a lawyer draft or review it, to avoid disputes that may arise later. If disputes arise between tenant and landlord after the lease expires, either party is advised to seek the assistance of a professional lawyer to maximise the protection of your rights. On commercial leasing, we have written many thematic articles that explain in detail the matters to be aware of in commercial leases — you are welcome to read them:
Do retail leases also require advance notice before expiry?
Disputes in Australian commercial leases: how landlords and tenants can properly resolve them
