It’s surprisingly common for businesses (particularly new ones) to enter into commercial leases without reviewing the documents or negotiating anything other than the rent. Leases can throw up some curveballs for unsuspecting tenants once the lease is signed your options are limited, so it’s best to try and get things right from the start.
If you are negotiating with or without the assistance of a lawyer, below are some basic things to look out for:
(a) Try and limit your exposure. If it’s a new venture, consider setting up a company to be the tenant;
(b) Oppose a personal guarantee even if it means that you pay a higher security deposit/bank guarantee (access to cash permitted);
(c) Defaulting on a lease, can give rise to extensive damages, particularly if the lease is terminated early on and the landlord struggles to find a new tenant. The last thing you want when dealing with a failed venture is to have an angry landlord claiming a stake to your home.
(a) It’s quite common for leases to allow the landlord to terminate if you don’t pay rent within 7-14 days of the due date (irrespective of the reason). Require that the landlord provide you with written notice of a breach of the lease (and an opportunity to remedy) prior to terminating the lease for non-payment of rent or otherwise;
(b) Keep an eye out for demolition or similar clauses which may entitle the landlord to end the lease early. If so, check if any compensation is provided and how much notice the landlord needs to give you. Fitting out a property is expensive and can easily run into the hundreds of thousands of dollars, and you should know whether the landlord can exit the lease early (and in what circumstances).
(a) Work out whether outgoings are included in the rent. If not, clarify what outgoings are included (some landlords can get creative);
(b) Be mindful of annual increases in the rent (whether it’s a fixed % increase, or based on market or CPI). By way of example, a starting rent of $100,000 with annual increases of 5%, will amount to $121,550 in base rent at the start of year 5.
(a) Check whether any options being offered are subject to prerequisites. For example, does the landlord require that you renovate the property? Is it subject to you not defaulting during the term of the lease?
(b) Look at how will rent be calculated at the start of the option period? It’s common for rent to be re-evaluated at the start of the option period by way of market-appraisal or otherwise.
(a) If the landlord is providing some form of incentive (e.g. a rent-free period), work out if it has to be repaid in certain circumstances – and if so, request that there are no strings attached.
(b) If a rent-free period is provided, confirm that outgoings are included.
Does the lease require you to repaint/re-tile etc after a certain period? Unless you’re particularly generous, you should try limit your obligations to leaving the property as you found it when the lease commenced.
(a) Does the permitted use noted in the lease fit in with your intended use? There’s no harm in having the permitted use broader than your actual intended use (try to think into the future). If your relationship with the landlord sours, expanding your juice bar into a café will prove difficult if it doesn’t fall within the leases permitted use.
(b) Check with the local Council about whether your intended use is approved, or whether a DA is required. Most leases place the obligation to confirm approval for the intended use on the tenant.
If you would like further information on the above topic feel free to get in touch:
Hamza Alameddine | Principal Solicitor
Office: +61 2 9018 1067
M: +61 424 747 799