Leasing Guide

Commercial Leases

Negotiating a business tenancy requires careful contract analysis. Whether you are a landlord securing commercial tenants or a business owner leasing premises, the lease covenants govern your financial liabilities for years.

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Reinstatement ("Make Good") Risks

Under Clause 12 of the standard ADLS Deed of Lease, the tenant must restore the premises to its original pre-lease condition upon lease expiry.

The Cost Trap: Tenants are responsible for removing partitions, cables, signs, and painting walls. Reinstatement exit bills often cost between $20,000 and $100,000 unless amended in the lease before signing.

The Twin Steps: Agreement vs. Deed of Lease

1. Agreement to Lease (The Initial Contract)

The Agreement to Lease is the preliminary document signed by both landlord and tenant to lock in the core deal. It specifies the base rent, term of lease, rights of renewal, outgoings shares, tenant guarantees, and any rent-free landlord fit-out periods.

**The Vetting Trap**: Many tenants sign the Agreement to Lease thinking they can negotiate detailed clauses later. However, the Agreement explicitly binds both parties to execute the full **ADLS Deed of Lease** template. Once the Agreement is signed, you cannot modify the Deed's standard clauses.

2. Deed of Lease (The Day-to-Day Rulebook)

The Deed of Lease is the formal legal document executed prior to possession. It outlines the operational covenants governing the tenancy, including: repair and maintenance obligations, outgoings recovery procedures, insurance schedules, assignability rules, and default remedies.

We review the draft Deed of Lease and insert customized amendments to protect your interests before any agreements are finalized.

ADLS Lease Scorecard: Landlord vs. Tenant Interests

Lease Covenants	Landlord Position	Tenant Position
Rent Review Ratchet	✓ Hard Ratchet (rent can never fall below peak level)	✗ Soft Ratchet (seek limit: rent can fall, but not below start level)
Outgoings Recoveries	✓ 100% Net Recovery (all building costs paid by tenant)	⚠ Limit outgoings (exclude capital upgrades & structural repairs)
Fit-out Reinstatement	✓ Mandatory "Make Good" (tenant removes all fit-out at expiry)	✗ High exit costs (seek amendment to leave standard fit-out)
Guarantor Liability	✓ Personal directors' guarantees for lease term	⚠ Limit guarantee duration or negotiate cash bank bond caps
Assigning / Subleasing	⚠ Retain consent control (prevent sub-leasing to competitors)	✓ Free assignment right (subject to solvent new tenant)

The Ratchet Clause & Outgoings Structures

1. Hard Ratchet vs. Soft Ratchet

Rent reviews often include "ratchet clauses" that protect landlords from drops in rental markets. Standard leases utilize two types of ratchets during a market review:

**Hard Ratchet**: Rent can never decrease. If the market value of the office drops by 20%, the tenant must continue paying the current rent. Rent only goes up or stays the same.
**Soft Ratchet**: Rent can decrease during a market review, but **it cannot fall below the starting rent** agreed at the beginning of the lease term. This protects the landlord's original yield while offering some relief to the tenant.

We negotiate with landlords to amend hard ratchets to soft ratchets to protect tenant business cashflows.

2. Gross Lease vs. Net Lease Outgoings

Outgoings are the costs of operating and maintaining the building. How these are billed depends on the lease structure:

**Gross Lease**: The tenant pays a single, all-inclusive rent amount. The landlord pays all council rates, insurance premiums, and body corporate levies out of this rent.

**Net Lease**: The tenant pays a base rent **plus** their proportion of all building outgoings. Under standard ADLS Net Leases, outgoings include council rates, building insurance premiums, water/utility charges, fire alarm maintenance, and body corporate levies.

**The Safeguard**: We check that capital improvements (such as structural strengthening or replacing a central HVAC system) are excluded from the tenant's outgoings schedule, as these are capital assets belonging to the landlord.

Reinstatement & Director Guarantees

REINSTATEMENT AMENDMENTS

To protect tenants from massive exit costs, we draft custom amendments to Clause 12 of the ADLS Deed of Lease prior to execution:

Proposed Clause: "The tenant shall not be required to remove any standard partitions, suspended ceilings, light fittings, or floor coverings installed during the fit-out, and the premises may be returned in a clean and tidy state, fair wear and tear excepted."

This prevents landlords from demanding full building reinstatement at lease end.

Personal Director Guarantees

If the tenant is a private company, landlords require the company directors to sign personal guarantees. This makes the directors personally liable for all unpaid rent and building damages.

**The Risk**: Personal liability remains in place even if the business is sold and the lease is assigned to a new tenant, unless the landlord signs a formal release of guarantee.

**The Legal Fix**: We negotiate to cap the personal guarantee to a specific dollar amount (e.g. 6 months' rent) or substitute the personal guarantee with a cash **Bank Bond** (held in trust for the landlord), protecting the directors' personal homes from business default risks.

Instruct Quay Law to Audit Your Commercial Lease

Ensure your rent reviews, outgoings recovery profiles, reinstatement liabilities, and personal guarantees are vetted by experienced property lawyers. Request a quote online today.

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Frequently Asked Questions

A right of renewal gives the tenant the option to extend the lease for a further term (e.g. renewing for another 3 years). Under standard ADLS leases, the tenant must give the landlord written notice of their intention to renew at least **3 calendar months** before the current lease term expires. If you miss this deadline, the right of renewal lapses, and the landlord can lease the premises to a new tenant.

Under the Property Law Act 2007, a landlord cannot unreasonably withhold consent to assign a lease to a new business buyer. However, the landlord can refuse consent if the proposed new tenant does not have a sound financial track record or if their proposed business usage conflicts with existing exclusivity covenants in the shopping complex or building.

Under the standard ADLS Deed of Lease, the landlord is responsible for structural maintenance (roof repairs, exterior walls, and foundations) and maintaining building services (like elevators and central HVAC systems). The tenant is responsible for internal maintenance, including replacing lightbulbs, keeping the interior clean, and repairing any damage they cause to interior walls or fittings.

Discuss Your Commercial Transaction

If you have an urgent contract review, an upcoming auction, or require advice on wills and trusts, contact our Remuera office. You will speak with a solicitor, not a call centre, and we will tell you honestly how we can help.