If you own a business, chances are you may need to consider entering into a commercial lease. So how do these differ from ordinary, residential leases? There are a number of things you need to look out for. This article will cover the four most important things to look out for before signing the dotted line.
1. Retail Leases vs. General Commercial Lease
There are some important differences between how the law deals with retail leases and general commercial leases. Each Australian State and Territory has its own legislation relating to retail leases. The purpose of this legislation is to provide greater protection for retail tenants and to impose a wider range of obligations on commercial landlords.
In turn, before entering into a commercial lease, you should first consider whether the retail leasing legislation in your State or Territory will apply to you. Whether or not it does will depend upon whether your lease falls within the definition of a retail lease provided in each piece of legislation, or whether an exception applies. Your answer to this question will likely have significant legal and practical consequences for your business. For example, in NSW, the Retail Leases Act 1994 (NSW) specifies that the term for a retail lease must be at least five years, unless a solicitor or conveyancer explains how the Act works and you give the landlord a certificate pursuant to section 16 of the Act by which you elect to waive that minimum period in favour of a lesser term.
2. Terms of the Lease and Options
The term of the lease is extremely important for business tenants. There often exists a conflict of interest between landlords and tenants with regard to the terms of leases so it is important to be informed and look out for your best interests.
Generally, landlords prefer the security of a longer term lease (for example, 5 or 10 years), whereas tenants usually prefer the flexibility afforded by a shorter lease (3 years is about standard). This is especially the case for start-up business tenants who commonly either go out of business or rapidly expand and require a new lease to expand operations in the near future. Keep in mind that, as mentioned, if the relevant retail lease legislation applies to your lease, there may be restrictions upon the minimum term of your lease.
Another important consideration is whether the lease provides you with an option to renew at the end of the initial term so you have the option to continue trading. This is very important for commercial leases as a large proportion of your businesses’ goodwill may be attached to your premises, so you may want to protect this.
3. Rent and Security
The rent clause is probably the most obviously important aspect of any lease agreement. When it comes to paying out expenses, we all want to keep it to a minimum! The rent clause specifies the the amount of money the tenant must pay to the landlord in return for the landlord providing the use and occupation of the property. Rent is a significant operating expense for most businesses.
The rent for the initial term, as well as any changes to the rent, must be specified in the lease. The most common methods of rent review (i.e. changes in rent) are consumer price index (CPI), fixed percentage increase and market rent. It is important to ensure you will be able to afford any proposed rent increases during the period of your lease and any renewal period to avoid falling behind.
The landlord may also request a security payment from the tenant to protect against the tenant failing to pay rent (i.e. defaulting). This would either be in the form of a bank guarantee by an individual tenant, or a personal guarantee by a company tenant’s directors. The security deposit can be a significant amount of money, usually equal to three to six months’ rent. Therefore, you shouldn’t forget this cost when assessing the affordability of your commercial lease.
Lastly, you should also review the termination clause contained in your commercial lease. Keep an eye out for any clause which allows the landlord to terminate the lease before the end of the term. In most cases, it is highly advised that you seek to have this removed as it causes uncertainty of your lease which can be very damaging for your business. Further, you should be aware of any other circumstances which will cause your lease to be terminated.
Get Advice from a Professional
There are clearly some very important things to look out for when entering a commercial lease for your business. Each of these factors has the potential to have a major impact on the performance of your business, so it is worth looking into obtaining independent legal advice to protect your best interests. As a potential tenant, if you are unhappy with any aspect of your lease agreement, you should negotiate with your landlord to reach an agreement that suits your needs.