Depending on the nature of your business, your business location is often how your customers identify with your business. Whether that location is important for foot traffic, high visibility, or is a business that requires specific space for its use, such as a childcare centre, hotel or motel, the contract allowing your business to occupy that space is vitally important.

Unless you are fortunate enough to have the freehold of a premises for your business, your lease is an incredibly important contract for your business's survival. Without a right to occupy your place of business, your business runs the risk of becoming homeless and losing that important location and in some specific cases, the loss of that right is crushing to the value of your business.

The terms of your lease will always need to be catered to your specific business and its needs. Regardless of your business however, understanding your lease and its terms is of vital importance, and failing to know your rights and obligations under that contract can be fatal to your business in certain circumstances.

Whilst understanding all of your obligations and rights under any lease are important, here are five key terms to understand in any lease:

1. The Term

Knowing when your lease will expire and what is to happen after its expiry will vary from lease to lease. In most cases, the lease will move to a "holding over" period where you become a month-to-month lessee. In these circumstances, unless you enter into a new lease, the security of your business is extremely uncertain.

Being proactive in the months leading up to the expiry date of your lease and approaching the owner of the premises to negotiate a new lease before the lease expires is important to ensure that you can understand whether your business is at risk of needing to find a new home. For retail tenants in NSW, your landlord is required to give you 6 months' notice of their intention whether they will offer you a new lease (except where the lease is 12 months or less in which case it is 3 months notice).

2. Exercising Options

Generally, an option for a new lease favours the lessee. An option to be granted a new lease is a right for you to compel the lessor to grant you a new lease on the terms that have been agreed when the option was granted. If you have negotiated an option under your commercial or retail lease, it's incredibly important you understand the timeframe you have to exercise that right and how it must be exercised to be granted a new lease.

It is common for most leases to be between 3 months to six months prior to the expiry of the lease for when options to be granted a new lease are to be exercised. Whilst this may be the norm, other timeframes may be stipulated in the contract. Further, most leases require that in order to exercise any option the lessee must not be in breach of the current lease. If you are behind on the rent or are in breach of another term that prevents the valid exercise of the option, your business could be at risk.

Typically leases will include provisions for how rent under any option lease will be determined. So if you fail to exercise the option, the lessor may be willing to provide you with a new lease however its terms may be drastically different to the lease that you could have been granted under the option.

3. Rental Increases

Your rent will generally increase over the term of the lease depending on the terms. Understanding when you enter into a lease what the potential rent could be over the lease term will allow you to plan and budget for your business.

We generally recommend that fixed increases be avoided where possible and reviews of the market be undertaken every three years. Be mindful that whilst under retail leases in NSW, a floor or "ratchet" on the rent is unenforceable, under a commercial lease there is no legislation preventing such clauses.

4. Make Good and Redecorating

Almost all commercial and retail leases require a lessee to make good the premises back to its original condition when leased. This typically means removing all your plant and equipment and fit-out and returning the premises back to the way you found it. In some cases, you may have spent a significant amount of money on your fit-out and its removal can also be expensive.

Having terms in your lease which allow you to negotiate the make good with the lessor allows for flexibility and in some cases is of benefit to all parties involved at the end of the lease.

Some leases also require you to redecorate the premises every certain number of years. Having a clear understanding of what that obligation is, whether it is just to repaint or if it requires a full refit of your premises is important for your budget and future business planning.

5. Termination and re-entry

Generally speaking, a lease will always provide for how and when a party may exercise their right to terminate the lease. In many cases, terms relating to the payment of rent and outgoings, making good, and keeping insurance are "essential" terms of a lease, meaning that failing to comply in the most minimal way by the lessee could entitle a lessor to terminate a lease.

Under most leases, a landlord may exercise a right to terminate the lease by what is known as "re-entering". This is where the lessor, or their agent, takes back possession of the premises, often by changing the locks. Under terms of some leases, this may be done with no notice to the lessee.

Any party seeking to exercise their right to terminate a lease should approach this with caution and seek legal advice. Many legislative changes have occurred in NSW which may override a contractual right to terminate a lease and it is always practical to have a full understanding of your legal rights in terminating any legal agreement.

So how can we help?

Kenny Spring can assist with advising on terms of commercial and retail leases and negotiating terms where necessary. Our team is equipped with expert business, property, and tax solicitors with years of experience in commercial and retail leasing, contact us on 02 6331 2911 – we're here to help!

Andrew Kelly | Solicitor