One of the biggest issues facing first time commercial tenants is to know when in the process to contact a lawyer to get advice.
The common process is to first work with a commercial real estate agent or the landlord to prepare and enter into an agreement with a document called a ‘Heads of Agreement’ (HOA) or ‘Term Sheet’.
What is a HOA?
Usually, the HOA is a short document setting out the major terms agreed upon between the parties. For example:
- The annual rent (excluding GST)
- The yearly rent increases;
- Any outgoings payable by the Tenant in addition to the Rent (for example, rates, strata levies)
- The lease duration;
- Any options to extend the lease;
- Any repairs or works that the landlord or tenant will undertake prior to entering the premises;
- Incentives; and
- Any other matters discussed between the landlord and the tenant.
Once the HOA is signed by both Tenant and Landlord, the landlord’s solicitors issue the formal lease based on the matters discussed in the HOA. It is at this stage in the process that you should contact your solicitor and give them a copy of the HOA and give their details to the agent or landlord’s solicitor.
Is a HOA legally binding?
The short answer, as always for lawyers, is that ‘it depends’. Usually there will be terms in the HOA that are binding, but the HOA does not generally bind you to the terms of the lease itself. For example, the HOA might specify that a Tenant is still be liable for the legal fees of the landlord if the Tenant refuses to sign the formal lease document.
However, signing the HOA should not bind you to the terms of the lease. If you are concerned about the provisions of the HOA, then you should seek legal advice before signing the HOA or any similar document.
What are the Dos and DO NOTs of a commercial lease?
DO NOT enter possession of the premises (for example, accept the keys from the agent or landlord) prior to seeking legal advice on and signing the formal lease. Simply because accepting the keys may be deemed as acceptance of some or all of the terms of the lease.
DO review the HOA carefully and ensure all matters are included – for example, any verbal promises from the landlord regarding incentives, rebates, works to be conducted or any other matter.
DO make sure that you inspect the premises and make sure that they will meet the requirements of your business. For example, if you are running a café or restaurant, make sure that the premises will or can be fitted out to accommodate the necessary plumbing, grease traps etc.
DO NOT sign anything you are not comfortable signing without seeking legal advice first. The High Court has held that signing a contract can be an acceptance of its terms regardless of whether or not you have read or understood them.
If you have any questions about commercial leasing, please contact our team at Chamberlains for helpful, timely and reliable advice.