7 Things To Pay Attention To When Entering A Commercial Lease
“When leasing a commercial property (such as office space, warehouse, retail shop etc), you can either negotiate the terms yourself, or ask your business lawyer for some help. If it is your first time, you ought to consider getting your business lawyer on board earlier, to make sure you know what you are signing up to, and to make sure you know the extent of your liability.
There are legal rules and obligations relating to what a lessor can and can’t do when offering a tenant certain terms and conditions, and this also extends to what can and can’t be included in the lease documents. These rules and obligations can vary across different jurisdictions, and are slightly different for retail premises. Your business lawyer can explain these to you and can help make sure all the necessary legal requirements are complied with.
During my years in legal practice I have seen clients caught out or taken by surprise at various points in their commercial leases. Many of these scenarios arose when the client wasn’t fully aware of the extent of their obligations under the lease. If you are thinking about entering a commercial lease, here are my 7 Tips for things to pay attention to before you sign:
1. Term of the Lease and Options to Renew - Be clear on how long the lease is for (there are some rules around this and your business lawyer will explain these to you). Know whether the lease contains an option (or options) to renew. If it does, take care to note the requirements to exercise the option (what you have to do and when), otherwise you could jeopardise your entitlement to enter into a further term.
2. Rent – Know the monthly rent payments, and whether those amounts are inclusive of GST. Take note of the rent review dates, and methods for any rent increases (a fixed increase, CPI increase or a market rent review). Factor those increases into your business plan and financial projections.
3. Outgoings – Make sure you understand what outgoings you will be required to pay, what proportion you will be responsible for, and pay attention to the base year used. Not being fully aware of this can leave you with an unexpected cost down the track.
4. Security Requirements – Understand before you sign, what security will be required of you. If the tenant is a corporate entity, are the directors required to provide a director guarantee? Do you need to provide a bank guarantee? If so, for how much?
5. Fit-Out and Tenant Works – If you want to do your own fit out, be sure that the terms of the lease permit it. Be very clear on what you can and can’t do, and what you need to do to obtain approval first.
6. Make-Good – Before you carry out any works, be sure to understand what your obligations are at the end of the lease term to return the premises to its prior (or original) condition. If you are not clear on this you could end up in a difficult position at the expiry of the lease, because unexpected make-good obligations can cause considerable delays and can be a significant, unplanned cost.
7. Exit Strategy – If your circumstances change and you want to terminate the lease early, know what do you need to do and be clear on the extent of your financial exposure.
Take the time to consult with your business lawyer at the beginning of the process, and certainly before you lock yourself in, so that you don’t need to call on them later should something unexpected arise.”
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Tracey Mylecharane - Solictor
Tracey Mylecharane has more than 12 years’ experience in legal practice and has developed considerable knowledge of business and commercial law issues. She has acted for small and medium businesses across several industries and has been able to assist clients with a vast range of issues from start-up structures and systems, supplier and third-party contracts, to partnership break-ups and dispute resolution (both in and out of court).