Things to Consider Before Entering into a Commercial Lease in NSW

Executive summary

• Entering into a commercial lease in NSW is a significant legal and financial commitment.

• Before signing, a lessee should carefully review the lease terms and confirm the premises are suitable for the intended business use.

• Practical due diligence should be undertaken on planning approvals, fire safety, services and infrastructure, repair and maintenance obligations, lease costs, and assignment or subletting rights.

• Any commercial agreement with the lessor, including incentives, rent-free periods, fitout works, access arrangements and special conditions, should be clearly recorded in the lease.

• Legal advice can help identify hidden risks, negotiate unfair or impractical terms, and ensure the lease properly reflects the agreed commercial arrangement before the lessee becomes legally bound.

Entering into a commercial lease is a significant legal and financial commitment. Before signing a lease as lessee, it is important to obtain legal advice so that the terms are reviewed carefully, reflect the commercial arrangement that has been agreed, and support your intended use of the premises.

A solicitor can assist by identifying obligations that may not be immediately obvious, negotiating provisions that are unfair or impractical, and ensuring the lease is consistent with your business needs before you become legally bound.

Recommended due diligence before signing

Before committing to a commercial lease, a lessee should undertake practical and legal due diligence on the premises, its approved use, and the obligations that will apply during and at the end of the lease term.

1. Confirm the permitted use and planning approvals

A lessee should independently satisfy itself that the permitted use of the premises, and any associated fitout, is legally compliant with Council requirements and other planning laws. This should be checked before the lease is signed.

It is prudent to make enquiries with the relevant Council about whether development consent already exists for the proposed use. If approval has not been obtained, the lessee should understand the application process, likely timeframes, costs and risks before committing to the lease.

2. Check fire safety compliance

Fire safety compliance can be significant and costly. It is also relevant to work health and safety obligations, and a failure to comply may expose a lessee to civil or criminal liability. Non-compliance may also affect workers’ compensation and public liability insurance arrangements.

For these reasons, it is sensible to request evidence from the lessor that the premises has a current Annual Fire Safety Statement and that the relevant obligations are up to date before the lease commences.

3. Confirm services and infrastructure

A lessee should confirm that the premises has the services required for the proposed business, including power, water, gas, internet and telecommunications services, broadband capacity and adequate mobile reception.

It is also important to check whether the premises has suitable power and other utilities and services, e.g. air conditioning, and whether any upgrades will be required to make the premises suitable for the intended use. If upgrades are needed, the lease should clearly deal with who is responsible for carrying them out and paying for them.

4. Assess repair, maintenance and condition issues

Commercial leases usually impose various repair and maintenance obligations on the lessee. Before the lease starts, the lessee should carefully consider the current condition of the premises and identify any pre-existing issues that should be rectified by the lessor.

A detailed ingoing condition report is strongly recommended. It can help establish the condition of the premises at commencement and reduce disputes about the lessee’s make-good obligations when the lease comes to an end.

Other important commercial lease considerations

1. Ensure all agreements are recorded in the lease

Any agreement reached with the lessor should be clearly reflected in the lease. This may include agreements about alterations, signage, fitout works, access arrangements, incentives, rent-free periods or any other special conditions.

If the lease does not include provisions that reflect what has been agreed, it may be difficult to enforce those arrangements once the lease has commenced.

2. Consider assignment and subletting rights

If there is any possibility that the lessee may later sell the business, assign the lease or sublet the premises, the lease should be reviewed to ensure it does not unreasonably prevent or restrict those arrangements.

The lessee should also understand the process for obtaining the lessor’s consent, the information that must be provided, and whether the lessee and any guarantors will be released after an assignment.

3. Understand lease costs

It is common for a lessee to be responsible for certain costs associated with the preparation, negotiation and registration of the lease documents. The lease should be reviewed so the lessee understands what costs are payable and when they are due.

4. Be aware of changes in shareholding

Where the lessee is a company, a change in shareholding may unintentionally trigger an assignment or transfer provision in the lease. This can require the lessor’s prior consent.

This issue should be considered carefully if there may be a future restructure, sale of shares, change in control, or introduction of new shareholders.

Key takeaways

The above matters are not an exhaustive list of the issues that may arise when entering into a commercial lease in NSW. However, they highlight the importance of reviewing both the legal terms of the lease and the practical suitability of the premises before signing.

A lessee should obtain advice from their legal adviser and, where appropriate, other professionals involved in the transaction, such as an accountant, town planner, financial adviser, insurance adviser or building consultant.

If you have any questions, or if you are considering entering into a commercial lease in NSW and require legal advice, please contact the property team at Jenkins Legal & Advisory.

This article is not legal advice and the views and comments are of a general nature only. This article is not to be relied upon in substitution for detailed legal advice.

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