Commercial Leases – Five Things You Need to Look Out For!

Commercial leases are a major expense for any business, so it is important to do your homework to make sure yours covers what you need

by Katherine Hawes, Digital Age Lawyers

Are you in the market for a lease for your business? Maybe your business already operates out of rented premises? If so, this article is for you. A commercial lease is a major expense for any business, so it is important to do your homework to make sure yours is right for you. Here are five things to consider before signing the dotted line.

1. Retail Lease vs. General Commercial Lease

Is the lease a retail lease or a general commercial lease? Every Australian state and territory has its own legislation relating to retail leases. Generally, this legislation provides greater protection for retail tenants and imposes a wider range of obligations upon commercial landlords. For example, in Victoria, a landlord of a retail lease is subject to strict legislation relating to disclosure statements and the process of termination. Find out whether you will be subject to the relevant legislation in your state or territory before entering a commercial lease.

2. Term of the Lease and Options

The term of a lease is extremely important for commercial leases. A conflict of interests often exists between commercial landlords and tenants, whereby landlords prefer the security of longer term leases, while tenants sometimes prefer the flexibility afforded by shorter term leases. This holds true especially for start-up business tenants who have greater uncertainty of future business performance and are likely to either rapidly expand or go out of business in the near future.

Another important consideration is whether the lease provides an option to renew at the end of the initial term. This is important for commercial leases as the ability to continue trading at a particular location may contribute to a significant portion of a business’ goodwill. To protect this, make sure your lease gives you an option to renew.

3. Permitted Use

Often overlooked, it is vital to make sure your leased premises fit your intended use of the premises for your business. This includes the types of goods you want to sell and the services you want to provide. There should be a clause in your commercial lease which outlines the permitted use of the property. Seek to negotiate a permitted use that is sufficiently broad enough to protect both your current and future business interests in case of expansion or shifts in processes.

4. Rent & Security

Rent is the main expense related to any lease and it usually represents a huge portion of a business’ operating expenses. The rent clause specifies the amount of money the tenant must pay to the landlord in return for the tenant’s use and occupation of the property.

The rent for the initial term, as well as any changes, should be stated on the lease. In Australia, the most common methods of rent review are the consumer price index (CPI), fixed percentage increase, and market return. Make sure you can afford the rent and any proposed rent increases during the period of your lease and any renewal period to avoid the risk of default.

As protection from the risk of a tenant failing to pay rent (i.e. defaulting), landlords often require a security payment from tenants. This usually takes the form of either a bank guarantee by an individual tenant, or a personal guarantee by the directors of a company tenant. The security deposit is usually equivalent to 3-6 months’ rent. Consider this expense when assessing the affordability of your lease.

5. Termination

Last, it is important to investigate the termination clause of your commercial lease. Check if your lease contains a clause which allows the landlord to terminate the lease prior to the end of the term – and if there is, negotiate to have this removed. This will provide your business greater certainty of its ability to operate from the premises for the entire term of the lease. Also, be aware of any other circumstances that may lead to your lease being terminated to ensure you don’t deviate from the rules.

Get Advice from a Solicitor

Selecting the right commercial lease for your business is crucial. There are clearly several important things to consider before making the big decision. Before you lock your business into this big commitment, it is advised that you obtain independent legal advice to make sure your lease agreement protects your business’ best interests. Ultimately, if you aren’t satisfied with the clauses in your lease, you should seek to negotiate with your landlord to have them changed or removed.