Before we start talking about commercial lease options for Mount Gambier, let us first review the differences between the residential leases with which most of us are familiar, and commercial leases.
Residential leases are usually for a fixed term of one or two years and include the date on which the tenancy agreement ends. Following the end of the tenancy agreement, the property manager might allow the tenant to continue on a month-to-month lease arrangement. However, more commonly the property manager will liaise with the landlord and tenant to extend the tenancy on a new lease for a set period.
Residential tenancy leases are covered under The Residential Tenancies Act 1995 (SA), which states landlords’ and tenants’ rights and obligations.
Commercial leases differ in that they’re usually for a minimum of four or five years with what are known as ‘options’.
Commercial leases such as retail premises are subject to the Retail and Commercial Leases Act 1995. Additional legislation such as the Real Property Act 1886 protects landlords and tenants. However, many of the ‘rules’ fall under common law, which gives landlords and tenants more scope to work out equitable lease terms.
Option to renew: commercial property lease options
When you’re looking at commercial premises for lease, you might find that lease negotiations will involve discussing 4+4 or 4×4. This means that the base lease is for four years, with an option to renew the lease for another four years, making the total lease for eight years should you choose to extend. However, extending your lease with an option isn’t as simple as telling your property manager you want to extend your lease as per the option. There are regulations on when and how you can extend your lease option. Usually, the tenant needs to notify the property manager or landlord anywhere from six months before the end of the lease to around three months before. And a key thing to remember is that a commercial real estate lease is much harder to break than is a residential property lease.
Benefits to landlords and tenants of commercial lease options
Longer leases with option clauses give both tenants and landlords more certainty and enable them to build long-term relationships.
Tenants can achieve improved long-term awareness for their business or organisation when they can stay at one address for several years.
The landlord has more financial security, and a lease option can increase the value of the commercial asset, especially if the property is for sale.
Importantly, most risk-averse investors like to see a lease term of at least two years.
However, it is vital that both parties understand their rights and obligations under the terms of the commercial property lease.
What are the rules around lease options?
With a lease option, as a tenant, you have the choice of either terminating your lease at the end of the base lease agreement term or extending your lease for the period stated in the lease option. Landlords need to agree on the terms. However, you should be aware that the lease option clause will generally specify the time frame in which you must accept (or activate) this. Most frequently, this time frame is from three months to six months from the end of your base lease.
Note: Some leasing regulations have been modified during the pandemic. Please talk to us regarding your rights.
Need help understanding commercial lease options in Mt Gambier?
Give us a call at Herbert Commercial. We can explain how to structure your commercial property lease with options that benefit both landlords and tenants.
Call us today on 08 87 250 500 for industry-relevant, professional appraisal services to assist in determining market value for your commercial property sale.