Commercial leases: make good, options and outgoings

Make good

Make good is often the most expensive obligation in a commercial lease. Establish what condition you must return the premises to, whether the fitout must be removed, and whether the obligation is measured against a condition report. Without a photographic schedule of condition annexed to the lease, you will be arguing about the state of the premises five years from now with no evidence. A make good obligation on a modest tenancy routinely runs to tens of thousands of dollars.

Options

An option to renew is exercisable only within the window stated and only if you are not in breach. Miss the window by a day and the option is gone. The earliest and latest dates, and the required manner of giving notice, are set by the lease and are strictly applied.

Outgoings

Check what is included and how it is apportioned. Land tax can be passed on under a retail lease, but s 26 of the Retail Leases Act 1994 (NSW) limits recovery to the amount that would be assessed if the leased land were the only land the lessor owned — a single holding basis — and it must have been disclosed. Capital costs are a different question: s 23 provides that they are not recoverable from the lessee at all. Structural works are usually the landlord's, but poorly drafted definitions sweep them in. The landlord's estimate and the prior year's actual figures are the documents that show what outgoings come to.

Rent review

Look for a ratchet clause preventing rent going down at market review. In retail leases these are void. In a purely commercial lease they are enforceable.

Guarantees and bank guarantees

A personal guarantee and a bank guarantee are different things. Landlords often ask for both. A bank guarantee ties up cash and typically is not released for months after the lease ends. The release trigger and the amount are ordinarily matters for negotiation before the lease is signed.