Looking to enter into a lease for your business? If so, there are a number of things you should be aware of and keep an eye out for. Leases for businesses are not treated the same as residential leases so it’s important to know the differences. This article will provide a list of the key things to consider before signing on the dotted line.
- Is it a Retail Lease or a General Commercial Lease?
Each Australian state and territory has its own laws relating to retail leases. The main aim of the legislation is to provide greater protection for retail tenants and to impose a wider range of obligations on commercial landlords. Therefore, it is important to find out whether the relevant retail leasing laws apply to you. If they do, find out exactly what they are because they will likely have significant legal implications for your business.
- Term of the Lease and Options
There often exists a conflict of interest between landlords and tenants with regard to the term of a lease. In turn, it is important to be informed so you can look out for your own best interests. Generally, landlords prefer the security offered by a longer term lease (such as 5 or 10 years), whereas tenants often prefer the flexibility provided by a shorter lease (3 years is about standard). This applies especially to start-up businesses who often go out of business or rapidly expand and require a new lease to expand operations.
The option to renew a lease is another important factor which enables you to continue trading after the initial term. Your premises could represent a significant proportion of your business goodwill so it is vital to ensure it is protected.
- Rent and Security
The rent clause specifies the the amount of money the tenant must pay the landlord as consideration for the use and occupation of the property. The rent for the initial term, as well as any changes, are specified in the lease. The most common methods of rent review are CPI, fixed percentage increase and market rent. Make sure you can afford any proposed rent increases during the initial period and any renewal period of your lease.
The landlord may also require security in case the tenant fails to pay rent (i.e. defaults). This would be either a bank guarantee by an individual tenant, or a personal guarantee by a company tenant’s directors. A security deposit can be a lot of money (usually three to six months’ rent) so make sure you consider this when assessing the affordability of your lease.
Finally, it is important to review the termination clause in your commercial lease. Look out for any clause that allows the landlord to terminate the lease before the end of the term. If you find one, seek to have this removed! Also, make sure you’re aware of any other circumstances which would cause your lease to be terminated.
Commercial leases are their own species of lease so it’s essential to understand the differences. Rent is often one of the biggest expenses for businesses so making the right decisions about your lease could be crucial for your business success. It is often a good idea to obtain independent legal and business advice to make sure you’re lease is right for you. Ultimately, if you are unhappy with any of the clauses contained in your lease, you should try to negotiate with your landlord to have them altered or removed.
It is a good idea to have the lease reviewed before signing so that you understand your obligations and rights under the lease.