Entering into a commercial Lease is a significant commitment for any business. It requires careful consideration to ensure that the Lease terms align with your business objectives and financial capabilities. Tenants should approach the process with a comprehensive understanding of their rights, responsibilities and potential liabilities.
Keep reading for ten essential tips, to help prospective commercial Tenants navigate through the complexities of leasing.
1. Choose the Right Lease Entity
Selecting the appropriate entity to hold the Lease is fundamental. Whether you Lease as an individual, a corporation, a partnership or another type of legal entity, affects your liability, your tax responsibilities and your creditworthiness. Discuss with your trusted legal advisor or your accountant, which entity best suits your business’s needs and will shield you from personal liabilities.
2. Consider the Usage Clause
The usage clause in your Lease dictates what you can and cannot do within the leased premises. Make sure the description of permitted use is broad enough to cover all potential business activities you might want to undertake, during the term of the Lease. A narrow usage clause can limit your operations and growth, while violations of this clause could result in Lease termination.
3. Understand Your Rent Structure
Commercial leases can be complex, with varying structures such as gross rent, net rent and / or percentage rent. Acquaint yourself with what is included in the rent, the payment schedule expected by the Landlord and any provisions for rent increases. Clarify if the stated rent is plus or including GST.
4. Secure Your Security
Landlords typically require security deposits or guarantees to cover damages or unpaid rent. Determine what form of security is required, whether it be a cash deposit, bank guarantee or personal guarantee and understand the conditions under which the Landlord can draw on this security. Ensure that the amount is reasonable and that there is a clear process for its return at the end of the Lease.
5. Review Critical Dates
Critical dates are not to be overlooked. The handover date signifies when you can start your fitout and operations, while the expiry date dictates the end of your Lease term. Also, be mindful of any options to renew and the notice periods required. Ensure these dates align with your business plans and consider negotiating flexibility for unforeseen circumstances.
6. Examine Annual Reviews
Rent typically increases annually to keep pace with market conditions or inflation. These increases can be structured as a fixed percentage, tied to the Consumer Price Index (CPI) or determined by a market review. Understand how these reviews will impact your financials throughout the Lease term and negotiate caps if necessary to avoid unexpected spikes in rent.
7. Clarify Fitout Responsibilities
Knowing who is responsible for the initial fitout and any changes to the premises is key. These responsibilities can be assumed entirely by the Tenant, shared with the Landlord or occasionally, undertaken by the Landlord with costs spread over the Lease term. Detailed terms should outline who covers the costs and approves the designs, as well as what happens upon Lease expiry.
8. Understand Makegood Responsibilities
When moving out of your premises, Tenants may be required to “makegood” the premises, restoring it to its original condition. This responsibility can be extensive and expensive, including removal of fitout works, repairs and reinstatement of original fixtures. Clarify the extent of this obligation at the outset to avoid disputes and unexpected costs at the end of your Lease. Sometimes negotiation can lead to a predetermined “makegood” provision, offering greater clarity and control over end of Lease expenses.
9. Beware of Other Hidden Costs
There can be additional costs hiding in the fine print. These may include administrative fees, property management fees, legal costs and expenses associated with compliance to building codes and regulations. Scrutinize the Lease terms or involve an experienced lease negotiator or lawyer to identify and understand the potential financial implications of all ancillary costs.
10. Assess the Extent of Outgoings Expenses
Outgoings such as taxes, insurance, utilities and maintenance are often passed on to the Tenant in addition to rent. It’s vital to negotiate which outgoings you’ll be responsible for and see if there’s an option to cap these expenses. Request historical figures for these outgoings to estimate your costs accurately and to prevent surprises.
So, to summarise, before entering a commercial Lease, it is paramount that Tenants understand every angle of the agreement. Doing due diligence in evaluating the Lease entity, usage clause, rent structure, security requirements, critical dates, annual reviews, fitout and makegood responsibilities and identifying hidden costs will pay dividends throughout the course of your Lease term. Being thorough might seem time consuming at the outset, but it can ultimately save you from significant financial and legal hurdles down the road. A commercial Lease is not just a legal document; it’s the framework within which your business will operate. Ensure it fits your business model as snugly and supportively as the ideal premises it describes. When in doubt, seek professional advice from a commercial lease negotiator to ensure that you are making an informed decision that sets your business up for long term success.
Your Leasing Co. specialises in Tenant / Landlord communication and representing Tenants to negotiate favorable lease terms. If you have any questions or need any help to get the best outcome from your Lease, you can call Kelly Cunningham for a free, no obligation conversation on 1300 356 702.