The Difference Between a Commercial lease and a Commercial Tenancy Agreement

The Difference Between a Commercial lease and a Commercial Tenancy Agreement

25 September 2023

In the complex world of commercial real estate, there is no shortage of things which most normal people would find very confusing. One thing that many find to be a point of contention is the rather extensive differences between a commercial lease and a commercial tenancy agreement – Which most people assume are one and the same thing.

Truth is, they are not. And the differences are hugely important, whether you are a tenant or landlord. Most people would probably be surprised to find out that there is more than one means of leasing a commercial property, but understanding the distinct differences between these documents is hugely important.

 

Commercial Leases

A full commercial lease is a legal document binding the landlord and tenant to and agreement which is actually registered on the title of the property. It is a comprehensive document which can be drafted only by a registered solicitor and covers everything from the agreed rent and lease term to treatment of outgoings, personal guarantees, “make-good” provisions, insurance requirements and much more. Its signing requires the witnessing of a Justice of the Peace and is normally registered with the titles office once executed – Meaning that if the property is sold, the lease is unilaterally transferred to the new owner as part of the purchase.

These documents are not a standard template – They can be modified (by a registered legal practitioner) as much as needed in order to facilitate the requirements of the lessor and lessee. The purpose of a commercial lease is to remove all ambiguity from the leasing process – In any event, including disputes, the commercial lease is the universal reference point and covers every potential contingency.

A commercial lease is required in all circumstances where the lease is longer than 3 years (including options), and they can run for any period negotiated between the landlord and tenant up to a maximum of 99 years. The costs involved in preparing a commercial lease can run into the thousands of dollars, depending on the level of complexity required, and it is commonplace (and perfectly legal) for landlord to pass these costs on to the tenant.

Commercial Tenancy Agreements

A commercial tenancy agreement (CTA) on the other hand is a pro-forma document supplied by the REIQ which commercial leasing agents can use to sign up short-term tenancies without needing to engage a solicitor. They are not as detailed as a full commercial lease and are useful mainly for small tenancies with short terms where the costs involved with drawing up a full commercial lease are prohibitive – But there are some shortcomings to this document which every landlord and tenant should be aware of.

Firstly, a CTA cannot be registered on the title of the property. This has implications mainly for tenants, whereby if the property is sold the new owner has no legal obligation to honour options. Additionally, a CTA can only legally be used if the lease term is 3 years or less.

Most importantly, a CTA does not feature the detailed provisions of a commercial lease such as payment of outgoings, responsibility for insurances and “making good” at the end of the tenancy, which can cause many of these agreements to fall into dispute.

All of which means that while a CTA might be a convenient and cost-effective solution for a small tenancy on on short term lease, it’s application should not extend to larger, more complex lease agreements to ensure that all aspects of the agreement are covered and avoid lengthy and costly legal disputes.

Retail Lease Agreements

Distinct from all other forms of commercial lease, retail lease agreements in Queensland are covered by a completely different legislation – The Retail Shop Leases Act 1994. This act covers all properties which meet the following three criteria:

  1. The property is used exclusively for retail purposes according to the Retail Shop Lease Act (RSLA)
  2. The property exists in a single level retail building with at least 5 retail shops
  3. The property exists in a multi-storey building with at least 5 retail shops on the same floor

This act governs all retail leases in Queensland separately to other commercial agreements, which are still governed by the Property law Act 1974 and features its own forms and procedures which have significant differences to standard commercial property law. The legislation is more detailed, and is designed to balance the scales in the negotiation between the landlord and tenant by prohibiting certain activities that are otherwise permitted in other commercial leases.

Three very important differences between retail shop leases and regular commercial leases are as follows:

  1. In a retail shop lease, the landlord cannot pass on the costs of lease preparation to the tenant, which is standard practice in other commercial leases
  2. Non refundable deposits (which are commonplace elsewhere in commercial real estate leases) are not permitted under the retail shop leases act
  3. Prior to entering the lease (at least 7 days), the landlord is required to provide the tenant with a Disclosure Statement which sets out the essential terms of the lease prior to signing.

Have a commercial property for lease and need advice on what sort of documentation best suits you? Contact House Commercial today for expert advice on all things commercial real estate.

Til next time, ciao 😊

 

Disclaimer: The information is this article is for general information only, it is not intended and should not be considered as either legal or financial advice. The information contained herein should not be relied upon solely and all parties are encouraged to obtain their own independent advice before making any financial decision.
Lee Knutsen

Article by Lee Knutsen

Co-founder & Managing Director of House, Lee Knutsen first entered the real estate industry in 2006 as a residential sales specialist. After more than a decade as a sales agent…

Call 0412 757 981 Email Lee