Critical issues for landlords to consider when a commercial tenant is moving out
Understanding what you should be doing at the end of a commercial lease is key to ensuring the lease arrangement ends amicably and you’re ready to place your next tenant. As the landlord, you should consider the following matters as soon as you are aware that the parties will not be renegotiating a further term:
- make good obligations
- environmental laws
- return of the tenant’s security;
- your insurance; and
- removal of the lease from title.
It is best practice to consider these matters at least 6 months prior to the expiration of the lease to ensure a smooth transition from one tenant to the next.Further information on each of these points is provided below.
Make good obligations
In most commercial leases, where the tenant has decorated or undertaken a fit out of the premises, there will usually be a “make good” clause requiring the tenant to “make good” the premises at the end of the lease. A standard make good clause generally requires a tenant to return the leased premises to the original condition as at the commencement of the lease including to remove the tenant’s fitout and property and to reinstate any parts of the premises that were damaged during the lease term, leaving the premises in a clean and tidy state.
Some make good clauses can be quite lengthy and can impose additional obligations on the tenant such as cleaning walls, repainting the interior and/or exterior of the building, recarpeting the floors and replacing light bulbs and/or window furnishings. The clause might provide specific timeframes by when works need to be completed and consequences if the tenant fails to complete the works by the due date.
While a make good clause is a standard feature of a commercial lease, disputes often arise between the parties at the end of the lease due to the clause being too brief or ambiguous or, in some instances, not relevant to the premises in question. The latter scenario can occur where the parties have given little thought to the wording of the make good clause prior to entering the lease and a standard or generally worded clause has been used in haste.
In any event, you will often be stuck with the make good clause as it is drafted and it is therefore important that you take the time to review the clause wording carefully so that you understand what works the tenant is (or isn’t) required to complete and by when. These matters are often left until the last moment and ideally should be settled amicably at a joint inspection with the tenant well prior to the expiry date of the lease.
Some leases will contain a requirement that the tenant, usually only at the request of the landlord, will provide the landlord with a site contamination report from an appropriately qualified expert to confirm whether the tenant’s use of the premises has caused any site contamination. If the report indicates that, as a consequence of the tenant’s use of the premises, the land is now contaminated, the tenant will be responsible for satisfying the relevant regulatory authority that the land has been remediated.
You should check whether your lease contains wording to this effect and if you are concerned that the premises may now be contaminated as a result of the tenant’s use, you should ensure you make a request to the tenant to produce the required reports within any noted timeframe.
Return of tenant’s security
If you are holding security on behalf of the tenant this will need to be returned to the tenant at the end of the lease. Common forms of security include bank guarantees, security bonds and personal guarantees.
The tenant will likely ask you to return any bank guarantee or security bond they have provided to you within a reasonable time after the end of the lease. In the case of a bank guarantee, it will usually be sufficient for you to notify the bank that the guarantee you hold is no longer required and provide your consent to it being cancelled, however the tenant may require you to hand over any physical bank guarantee in your possession.
If the tenant has provided a personal guarantee they will usually request that you agree to release them from the guarantee at the expiration of the lease. This form of release is best documented in the form of a deed signed by the landlord, tenant and the guarantor.
While you are required to return the tenant’s security at the end of the lease, before you agree to return, refund or release any security that you hold on behalf of the tenant, you should be comfortable that the tenant has complied with all of its obligations under the lease, including any end of term obligations. If you believe the tenant is in breach of the lease, we suggest you seek legal advice before making a claim on the security as certain notices may need to be given to the tenant in accordance with the Property Law Act 1974 (Qld).
Depending on your insurance policy, you may need to contact your insurer to inform them if the premises will be vacant for any period of time before your new tenant moves in. You may also need to advise your insurer if the permitted use of the premises will change (for example if your current tenant operated an office space and the next tenant will be operating a liqueur store).
Removal of expired lease from title
If the lease was registered with the Titles Office, you should attend to removing the lease from the title as the Registrar does not automatically remove expired leases from the title.
If the lease has expired and there are no further option periods contained in the lease then the landlord can simply lodge a Form 14 - General Request to record the removal of the expired lease from the title. No lodgement fee is payable in that instance. If, however, there remains an option under the lease that has not been exercised, then in addition to the Form 14 - General Request the landlord must complete a Form 20 - Declaration stating that the option has not been exercised. A lodgement fee is payable in that instance. Alternatively, you may lodge a Form 8 - Surrender which carries the same lodgement fee however this form requires both parties to sign which may not always be practical. Alternatively, a subsequent lease (correctly drafted) can have the same affect.
The consequence of not removing the expired lease from the title is minimal, however it is best practice to attend to these matters as soon as possible leaving the title free from any unnecessary encumbrances.
We are experienced in assisting both landlords and tenants by reviewing leases and providing practical advice on the rights and obligations of each party at the end of a commercial lease.
If you require advice regarding an end of lease dispute or simply want to discuss a commercial lease generally, we encourage to you to contact our Commercial + Property team.
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COMMERCIAL LEASING FOR LANDLORDS
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