Legal costs in commercial leases – who pays?

Updated: 5 December 2019

If you are negotiating a commercial lease, there’s a few clauses you’ll want to look out for, the legal costs clause is one.

So who pays legal costs?

In a nutshell, usually, both parties pay their own legal costs.

But, you may find  that's some landlords (aka lessors) will will try and get you to pay their legal costs.

And, if you come across a clause that asks you to pay the other side’s legal costs, you may challenge it and ask the landlord to pay their own costs. 

Before the lease - the heads of agreement or disclosure statement

Beware, the cost clause may appear not just in the lease but also in the first document outlining your key lease terms like the heads of agreement or a  disclosure statement (if you're entering a retail lease).

So does it matter if you sign a heads of agreement or disclosure statement before you see solicitor?

Yes and here's why. 

The heads of agreement and disclosure statement set the tone for what to expect in the lease and also, they may be legally binding.

And you’ll know this because you won't see a statement that says “these terms are not intended to be binding unless both parties enter a lease”.

So this answers a popular question that clients have: when should you see a lawyer about a commercial lease?

The answer: when you first get the heads of agreement or disclosure statement.

Negotiation trap 

Even if you do find a statement in a heads of agreement or disclosure statement that says the document won’t be binding until a lease is entered, beware of the negotiation trap.

The negotiation trap is when the landlord reminds you that you already agreed to certain terms upfront in the heads of agreement and the disclosure statement and it's too late to re-negotiate. 

So the moral of the story here - get advice early on before you sign of on initial key terms whether its a heads of agreement or disclosure statement.

The legal costs clause

Here’s an example of what a legal costs clause may look like in a lease (where the landlord asks you to pay their costs):

The lessee will pay the lessors lease preparation expenses including but not limited to costs on negotiation or amendments and the lessors reasonable legal and other costs, charges and expenses of and incidental to the completion and registration of the lease and any surrender or termination and the lessors reasonable legal costs and expenses in and about attending any mortgagee's consent and the production of title. 

 Now that’s one long clause!

I have given you this example because its' one of the worst clauses for legal costs. 

By the way, this clause was tucked away under "general", easy to miss.

Lease registration

The lease registration cost is usually borne by the tenant. It's paid to the land registry and usually costs around $140.

Now, the other costs in the clause above are usually paid for by the landlord.

That is, the landlord pays their own legal costs and you as the tenant, pay your own legal costs.

Important reminder!

While you may see legal costs under a clause labelled legal costs you may also find this clause tucked away under a heading labelled general or miscellaneous

Negotiate, because you have nothing to lose, and, you can stash the cash you'll save on legal costs for other setup costs.

Got questions or comments? Be sure to share them below. 

I wish you every success in your ventures! 


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Vivian Michael
 

Vivian Michael is a lawyer and founder of Michael Law Group. Vivian's mission is to make quality business legal services accessible to entrepreneurs launching in Australia.

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