Key Things to Know About Negotiating a Commercial Lease

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Do you have an amazing business idea? Perhaps it’s a retail concept you believe will take off and, what’s more, you’ve found the perfect premises in the perfect location.

Whoa, there! Before you go signing a letter of offer or intention, or a lease itself, you need to make sure you’ve done a proper investigation of the terms you’re agreeing to. A lease is a contractual document meaning that it is legally binding. It’s important you understand your rights and obligations under the lease agreement as if they are not in your favour, it can later affect the profitability and viability of the business you’d dreamed of, and therefore your livelihood.

This article addresses some of the basic things to research and consider before signing a commercial lease on a premises. Consulting a legal professional with experience in this area is highly advised both when you’re researching premises to lease and most certainly when you wish to proceed to signing a lease document.

What are some of the key things to consider when you’ve found the right premises?

It’s important to understand that the landlord and letting agent of a property have limited obligations regarding disclosure. This means, for example, they don’t have to inform a potential tenant that the property was previously damaged by a natural disaster. As a result, it’s incumbent on you to ask the right questions before signing a lease.

If the commercial premises you wish to lease is within a shopping centre (defined as a grouping of five or more shops), it’s likely any lease will be governed by the minimum standards included in the Retail Shop Leases Act 1994. This legislation offers greater protection for lease-holders, including disclosure obligations, turnover rent, options to extend, outgoings payable and recovery requirements, rent review mechanisms, trading hours, relocation and demolition procedures, dispute resolution and tenant compensation rights.

The key things to clarify before undertaking a lease are:

  • details of the lease;
  • details of the rent;
  • options, such as renewing, ending the lease early, or purchasing the premises;
  • expenses, including rates, taxes, repairs and insurance;
  • restrictions, such as the type of business you can conduct;
  • maintenance, including who pays for it.

Looking briefly at each of these, the terms of leases are usually negotiable and so you need to discuss with the landlord or letting agent questions such as who pays the legal costs for establishing the lease; when the lease starts and the period it applies; the consequences of breaches of the lease; the payment of a security deposit; and the possible impact of a lease on a franchise agreement.

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It is also important to distinguish between short-term leases, which provide flexibility but may not allow you time to recoup your investment in the business, and long-term leases which require registration with the Titles Office if longer than three years.

In terms of rent, some of the issues which all parties need to be clear on before signing a lease is whether the amount is paid weekly, monthly, or in advance; whether a deposit or other payment is required; how rent increases are decided and notified; and what the consequences are for late payment.

Within the lease agreement, what is the option to renew the lease and how long might it be renewed for? Is there an option to buy the premises after a period as the lease holder? Can you exit the lease before its term expires and if so, what are the penalties for doing so? Can the lease be transferred to someone else, or can you sublet the premises to share the rental costs?

Any business owner needs a clear picture of the ongoing costs and so understanding your likely expenses under the lease is crucial. If you’re in a shopping centre, do you have to contribute to marketing for the centre? Are there other rates or taxes, or charges for rubbish collection, air-conditioning maintenance or other upkeep involved? Is the insurance policy covering the premises paid for by the landlord or also by the tenant?

It’s also essential to understand any restrictions covering the premises: whether any types of businesses are banned (an entertainment venue selling alcohol, for example); whether you remove fixtures, fittings or furnishings you installed at the end of the lease, or whether there are any other lease terms which could adversely affect the ongoing profitability of your business.

Finally, there needs to be clear and unambiguous terms on who is responsible for organising and paying for maintenance of the premises, including the conditions around altering or improving the premises, as well as whether it needs to be left in pre-lease condition

Providing security for a commercial lease

Entering into a commercial or retail lease is a considerable financial commitment for a businessperson. For this reason, landlords will generally require you to provide a bank guarantee or security deposit before the lease starts. These are protection for the landlord in cases where the tenant breaches the lease or fails to pay rent when owing.

The terms of the lease should include the circumstances under which the landlord can apply the bank guarantee or security deposit, as well as an obligation on the tenant to top up any amount the landlord uses. The guarantee or deposit is returned to the tenant at the end of the lease, less any amount owing to the owner.

While a security deposit is a sum of money you provide to the landlord upfront, a bank guarantee can take up to 28 days to organise and approve through the financial institution and so requires you to plan ahead if you wish to use this form of security.

Landlords may also insist on a personal guarantee in addition to a security deposit or bank guarantee. This represents the landlord’s security against the tenant’s company and is used in the case where tenants operate a limited liability proprietary company. A personal guarantee does not require you to provide money to the landlord upfront but it does place your personal assets at risk should your company fall on rocky times and be unable to meet its commitments such as rent.

A tenant can sometimes avoid providing a personal guarantee by offering to increase the amount of the bank guarantee or security deposit, or by negotiating a cap on the amount of the personal guarantee provided.

The need for legal advice

As this article outlines, there is a lot to consider before you reach the stage of signing a commercial/retail lease. There are significant financial commitments involved and it’s important to get the terms of the lease right from the outset so there are no sudden surprises which later derail your business venture.

Financial and legal advice should always be sought beforehand. Big Law has a team with real-world experience in negotiating the terms of commercial leases and can provide expert, relevant advice to help guide you through the process when setting up business in a new place. Contact our Strathpine lawyers by phone (07) 3482 6999 or email mail@biglaw.com.au to schedule an appointment today.

At Big Law we provide holistic legal solutions to legal matters.

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