It is essential to not only be properly advised during the negotiation phase but also in relation to the terms of the lease.
Outlined below are some points that you should consider prior to making the next step in your business. The following advice is of a general nature and may vary depending on the type of lease you are entering.
Location
Are the premises in the best location for your business? Is there a good shop front with a decent amount of walk through traffic? Are there nearby shops which will bring people past your premises? Is there a competitor nearby?
In the excitement of setting up a new business or expanding a business, you must ensure that you do not rush into premises but confirm that the location is right for your business.
A lease is a serious investment which you will be locked into for a certain timeframe. You therefore, take your time to ensure you have found the ideal premises.
The investment
A lease is a serious financial investment. It is important to carry out thorough due diligence and prepare a business plan. You will be required to pay the rent regardless of the success or growth of your business. There are a lot of costs associated with running a business and therefore you need to make sure that you will be able to meet the financial obligations for the term of the lease.
Be informed
It is essential that you obtain sound legal advice on the terms of the lease before executing it or entering into possession of the premises. There may also be terms that you can negotiate with the landlord so it pays to be properly informed.
• Obligations – You must understand your responsibilities as a tenant including who will be responsible for the outgoings which may include general rates, water rates, land tax, insurance, repairs and maintenance, air-conditioning charges, gardening and management fees. These obligations must be set out clearly in the lease.
• Repairs – The lease should set out who is responsible for any repairs. Any existing damage should be rectified by the landlord prior to the commencement of the lease. The lease document should clearly set out the obligations of the landlord and detail the repairs needed. You should thoroughly inspect the property to see if there is existing damage so this can be raised with the landlord and outlined in the lease. During the lease, any maintenance which includes general repairs and maintenance is generally the responsibility of the tenants unless the maintenance is in relation to structural areas of the building or common areas.
• Relocation/ demolition – Is there a relocation or demolition clause in the lease? If so, try and negotiate for the deletion of such clauses.
• Term – The term of the lease must be agreed between the parties and any options to renew (an extension of the existing initial term of the lease). This will be particularly important if the location is essential to your ongoing business success. A longer lease is usually better as it will make your business easier to sell.
• Rent and rent reviews – Be certain that you understand the amounts of rent payable and the methods for rent reviews. It is common for a lease to have a set base rent for the first year and then increase in the years following, usually by CPI or a fixed percentage.
• Bank Guarantee – Be mindful of the usual requirement for a bank guarantee or cash security deposit (usually equivalent to 3 months rent), payable at the commencement of the lease.
• Turnover rent – If you are located within a shopping centre, you may be required to pay turnover rent. This means that you will be required to pay a certain portion of your turnover to the landlord, in addition to the rental amounts.
• Use – Ensure that the use of the lease premises is clearly set out for the purposes for which you want to use the premises. You may be required to get council consent. If retail use note different rules may apply.
• Trading hours – Are there set trading hours which your business must be open? Can you meet this obligation?
• Signage – Some leases do not allow certain signs to be displayed or require landlord consent. Ensure that this is outlined in the lease document.
• Expiration/ Termination responsibilities – What are your responsibilities at the expiration of the lease? Cleaning? Maintenance? You should be fully informed about your obligations at the expiration of the lease, including the need to remove any improvements or fitouts you might have done and return the premises to their original condition (referred to as "make good").
• Make Good – At the end of a lease, you are usually required to "make good" the premises which will involve you returning the premises to the condition it was in at the start of the lease. There can be disputes between the landlord and tenant as to what is actually required so make sure the lease clearly sets out your obligations (if applicable).
In conclusion you should not rush into entering a lease. Sound advice from an experienced solicitor is essential and if you would like us to review a lease for you, please do not hesitate to contact our office on 9680 6800.
