In the Australian and New Zealand commercial property industries, there are few more important terms than the lease. A lease ensures a mutually beneficial relationship between the lessor or ‘landlord’ and the lessee or ‘tenant’. It acts as the guide and rule book to how each party conducts their business by outlining their respective duties throughout the term of the tenancy.
Leases and legal language can be intimidating so it's vital that property teams are familiar with the terminology used and all the key points commonly presented in documents.
This guide unpacks everything you need to know about commercial leases and lease administration to make sure you’re managing leases effectively. So let’s begin.
Can lease administration software help?
What is a lease and why is it important?
A lease is the legally binding contract that sets out your rights and obligations as a landlord of a property. It stipulates the terms that ensure a tenant exclusive occupation of a premises for an agreed period of time by guaranteeing regular payment.
What is Lease Administration?
Once a lease is in place, lease administration is the process of ensuring the terms of the lease are followed. From receiving rents and conducting lease reviews to managing repairs and maintenance, lease administration is an integral component in managing your real estate portfolio. Understanding key terminology, clauses and timings means that a property manager recognises the ongoing commitments between each party involved in the lease agreement.
Main types of commercial leases in Australia and New Zealand?
A commercial lease contract is an agreement between a landlord and a tenant to use an office, warehouse, industrial property or a similar facility. It provides the tenant with exclusive rights to use a property to run a business.
While the basic framework of lease structures remains the same across Australia and New Zealand, the terminology behind leases differs depending upon where you reside. For example, what is referred to as an ‘outgoing’ in Australia, is defined as an ‘operating expense’ in New Zealand.
The Real Estate Authority of New Zealand states that: "Some large organisations have their own specific lease documents. Others use either the Property Council of New Zealand lease or the Auckland District Law Society (ADLS) lease. There are several versions of each lease, and you need to be able to distinguish between these."
You can find more information on New Zealand commercial lease documents here
When it comes to commercial lease frameworks across Australia, it's important to understand that each state and territory plays by its own rulebook. There is no legislation that governs the entire country which means state-by-state there will be grey areas in lease legislation and management. Working with an experienced property lawyer is vital to navigating this framework. Make sure you check what legislation applies in your region at the websites at the end of this article.
Heads of Agreement
Before a landlord and tenant enter into a lease, they may sign a Heads of Agreement (HOA). While HOAs are not obligatory, they are fairly common practice and will normally set out the terms and commercial aspects of the transaction including the proposed lease term, any specific clauses, key dates, and financial terms. An HOA is considered binding or non-binding which is normally stated clearly within a document.
A commercial lease usually applies to a premises that is used as a warehouse, industrial site or as an office in a commercial building where there is no retail activity.
A lease of a business premises where the permitted use is for selling goods. These shop premises are usually located in shopping centres, protected under state-based retail Acts.
The distinction between a commercial and retail lease is in the use of the premises and if any form of buying and selling to the public is to take place from the premises.
An agreement that offers a shorter, more flexible term between a licensee and licensor. A license agreement creates a legal relationship between two parties, but the licensor does not guarantee the licensee with exclusive use of a premises.
A lease where all operating costs on the property are included in the rental charged and the landlord is responsible for all outgoings. It provides the tenant with no other obligation to pay for costs apart from the agreed rent.
A lease where the landlord has agreed to incur a portion of the outgoings.
This lease requires the tenant to pay a set sum of rent in addition to the cost of outgoings on a premises, such as maintenance and repairs, taxes, council and water rates, strata levies, and management fees.
Common lease clauses you need to know
These terms and clauses are essential to both understand and properly interpret. Different leases will have different clauses but this is a selection of common ones to be aware of:
- Rental amount and payment terms - What amount is due to the landlord from the tenant and how often will it be paid. Most commonly we would see this billed monthly but it does also happen annually or quarterly.
- Rent increases - The lessee may have an increased amount from the initial lease term. That increase could be negotiated to be a set amount on a regular basis (annually) or it may be increased by inflation (CPI). In some instances, the lessor may want an amount that is indexed to inflation but there is a minimum amount (e.g. “CPI or 3%, whichever is greater”).
- Payment method - Most commonly we would see rent being paid directly into the agency’s trust account, or into the owner’s bank account. It can also be paid by cheque, direct debit or by credit card.
- Lease duration including start and end date - The lease duration may be stated in months or years. Important dates include the date the lease was executed, when the rent commences, when the tenant occupies the space and when the lease expires.
- Bond or Bank Guarantee - The lessor may require the lessee to secure the premises with an amount that will be held by the lessor for a designated period. The bond or bank guarantee depending on the legislation or lease agreement may be held with the owner, held with the agent or could be a bank guarantee.
- Leased premises - This is the physical address and should be described by a unit or suite number.
- Late payment and penalty - If the rent and/or additional rent payments are received by the lessor after they are due, the lessor reserves the right to charge a penalty. This amount may be based on a percentage of all or part of the amounts that are in arrears, It can also be a fixed amount or a combination of a percentage and fixed amounts depending on the lease agreement.
- Use of premises - The lessor may be very particular about the type of tenants who operate on the property and will specifically state in the lease what the type of business is operating in the space. This is particularly important in retail, as tenant mix can impact the surrounding businesses.
- Additional rent - An amount beyond the minimum rental amount. It may include expense recoveries for Outgoings/Operating Expenses such as utilities and car spaces that they may also occupy.
- Assignment and sublease - An assignment is the ability to transfer the rights and obligations of a leasehold interest to another party. A sublease is when a current lessee maintains their obligation in the lease but effectively becomes a lessor and leases their space to another party. In certain instances, a lessee may need to close or move their business but is legally bound to the agreement. Having the ability to sell the business and assign the lease is an important clause for the transfer of ownership. When a company needs to close an office or a store, and they cannot terminate their lease, they may wish to rent their space to another party in order to mitigate their losses.
- Insurance - Lessors require insurance for protection of both the lessor and lessee. Common insurance includes liability and property protection. Other types include business interruption and loss of use. The lease will specify both a minimum amount of the insurance and that the lessor be named as an additional insured.
- Indemnification - This is an assumption of risk whereby the lessee will agree to reimburse the lessor, or pay directly for any claims, suits, liability or expenses related to a liability that may occur on the property.
- Incentive/rent-free periods and end dates - Such as a rent-free period (at the start of the tenancy, or throughout the tenancy, rent relief (COVID-19 rent relief, depending on the legislation could be waived or deferred and may need to be paid back over a certain period of time.
- Fit-out, renovation, or refurbishment requirements or contributions - Generally these terms will be written into the lease agreement and will outline any items that the lessee will need to contribute towards, or items that the lessor will be contributing towards.
- Maintenance & repairs - It is important to ensure that the responsibility for repair is suitable in relation to the nature of the premises. For free-standing buildings, it is common for the tenant to be responsible for insuring for repair and damage caused to it. However, with buildings that have multiple tenants, the tenant’s responsibility is generally limited to repairing damage caused to the leased premises (not including structural repairs). Sometimes with properties that have multiple tenants the repairs to the building as a whole will have a % of the total overall building repairs broken down to each tenant as per the % they are occupying/renting.
- Ending the lease early / lease break clause - Including a ‘break clause’ allows the tenant to terminate the commercial lease earlier than the specified term. Most break lease clauses include a notice period where the tenant has to let the landlord know of their intention to break the lease. If a lease agreement doesn’t include a break lease clause, and the tenant ends up needing to leave the lease earlier than the anticipated term, sometimes the tenant may be required to buy out the term of the lease, assign it to a third party or otherwise negotiate an early exit with the landlord. Sometimes a Break Lease can enable the tenant to sell their business so the new person can take it over as is and continue the original lease as per original clauses.
- Percentage of building possession - In cases of a property with multiple tenants in the building, it may be possible/required to break down the % that the tenant is in possession of - which will justify the amount of overall repair/common area/outgoings contribution.
Key lease administration tasks to complete
Once you’re well acquainted with the various nuances of commercial leases, the real work starts as you begin managing everything set out in there. Your key tasks will include:
- Managing critical dates - Missing a critical date can have serious financial and legal consequences. This task involves staying on top of key dates related to the lease such as insurance expiration, exercising of options, option periods, rent increases, and lease commencement and expiration.
- Understanding lessor/lessee responsibilities - The lease should clearly define the responsibilities of all parties to the agreement, including physical attributes (e.g. roof, HVAC, parking spaces, etc.), operations (e.g. security, lighting, rubbish removal, etc.)
- Tracking certificates of insurance - Tracking insurance includes confirmation that the lessee has the proper insurance coverage including the type and amount of insurance as specified in the lease. It also means that the lessor has been named as an additional insured and that the insurance company is reputable.
Other tasks also include:
- Explaining and managing expense recoveries - Understanding these very important clauses is critical to maximizing the net operating income (NOI) of the property and providing the best customer service. Tenant relationships can be frayed when a lessee doesn’t fully understand the operating expenses they are being billed for. By having a thorough comprehension of each individual component, the lessee’s pro-rata share percentage calculation of all property expenses and the amounts, will help in explaining and justifying the amounts.
- Processing financial transactions on behalf of or to Owners / 3rd parties in accordance to the original agreement between parties.
- Auditing and reporting on behalf of the company or the lessee for financial/auditing purposes.
- Implementing/negotiating rental prices in accordance to the agreed method - CPI, Market, Fixed.
- Management of essential services.
COVID-19 has brought about important changes to commercial lease legislation across Australia and New Zealand. These changes impose a number of leasing principles to be followed by landlords to grant relief and protections to tenants whose businesses have been impacted by the pandemic. These changes encompass:
A waiver – the tenant no longer needs to pay the amount of rent that is waived.
A deferral – the tenant still needs to pay the amount of rent deferred but they can pay at a later stage.
Please review the specific legislation for your region for further information on COVID-19 policies. Useful links are at the end of this guide.
Can lease administration software help?
As you can see, there are numerous activities involved in proper lease management and this creates a significant amount of moving parts to coordinate and stay on top of. This is where technology becomes increasingly important. Automated, intelligent property management software, such as Re-Leased, can simplify how you monitor and renew leases and manage other critical dates from a single dashboard.
By driving workforce efficiency, technology can help commercial property managers and landlords save time and eliminate data redundancy, input errors, and costly missed critical dates.
Information in a cloud-based system is updated in real-time and is the same for anyone who accesses it, providing you with a single source of truth to work from that is accessible from anywhere with an internet connection.
Automation is another big advantage with a cloud-based property management system which frees up your time and removes the risk of human error.
Here are common workflows that are automated using Re-Leased:
- Generate & send rent and operating expense invoices
- Send notifications to tenants & owners
- Track payments & arrears
- Push reminders to your email or phone
- Match payments and reconcile bank accounts instantly
- Generate electronic files to automate payments to owners & creditors
- Generate statements and send to owners and creditors
Read the full story here of how Raine & Horne Commercial North Sydney
uses Re-Leased to streamline its business.
Investing in the lease
Understanding and tracking every lease detail is no minor task but it’s vital to effectively managing commercial properties and optimising how they operate to improve returns.
While the lease framework has remained the same for many years in Australia and New Zealand, the advent of tools and software to support and automate these processes has not only streamlined how property managers and landlords work but how they serve their tenants too.
Learn more about how Re-Leased helps you handle the intricacies of lease administration with ease HERE.
Useful Links & Resources
Real Estate Institute of Australia - www.reia.com.au
Property Council of Australia - Glossary of terms
www.vsbc.vic.gov.au - Access to Victorian Legislation
www.legislation.vic.gov.au - Commonwealth Legislation