Too often we see clients hamstrung by lease terms that they were not aware of when they signed up.
As a commercial tenant you may feel like you have limited bargaining power when negotiating the terms of your lease. This is far from true.
Reviewing lengthy lease documents can be a tedious task, but if you know what to look out for, you won’t need to settle on the landlord’s terms.
Not all leases are created equal
Leases exist in many forms, so to get started you’ll need to determine what kind of lease you are dealing with. For businesses it’s likely that you’ll be looking at either a retail shop lease or a commercial lease. So what’s the difference?
Generally, a retail shop lease is a lease of premises that are used primarily for retail business, or are situated in a retail shopping centre. The legal definition of “retail shopping centre” is different to what you would normally consider a retail shopping centre. Because of the complicated definition, some tenants are surprised to find out that retail shop leasing laws actually apply to their business.
Retail shop leases are highly regulated. There are strict disclosure rules that must be complied with, and you are obliged to obtain independent legal and financial advice before signing the lease. Failure to do so could mean that a dispute automatically exists under the legislation. You may also be subject to restrictions, for example, limits on opening hours and products that you can sell. For those reasons it’s important to seek legal advice if you think you may have a retail shop lease.
Commercial leases aren’t subject to the same stringent regulations that apply to retail shop leases. While this means there is less work involved in ensuring legal compliance, it also means there is less protection available for tenants and you will need to be proactive in negotiating terms.
To register or not to register?
A lease can be registered with the Department of Natural Resources and Mines. There is no obligation to do so, but if the lease remains unregistered your rights as a lessee are limited. The biggest difference is that in the event the landlord sells the property, if you have not registered the lease, then any new owner is not obliged to allow you to continue to occupy the property. This could potentially cause a serious disruption to your business, so you’ll need to weigh up the benefits of registering vs leaving the lease unregistered.
Reviewing and negotiating terms
When reviewing lease terms, as a minimum you should give some thought to the following:
- Who are you using as the leasing entity?
- How long is the term? Does that work with your business plan? Do you want any options to renew the lease or purchase the property?
- What is the rent? How is the rent reviewed? What other outgoings you are required to pay?
- Are there additional costs involved and how are they calculated? For example, will you pay the landlord’s costs for preparation and registration of the lease?
- Is a security deposit required and how can this be paid? Is a personal guarantee required, and are you willing to give one?
- What happens if rent payments are late? Does the landlord charge interest on late payments and if so, is it reasonable?
- What are possible events of default?
- Under what circumstances can either party terminate? What are the consequences of termination?
- Is subletting or transfer possible?
- What are your maintenance obligations? Do you have an obligation to make good the premises at the end of the term?
- Can either party make alterations or improvements to the premises?
- What are your insurance obligations?
- Will the landlord impose restrictions on the type of business you can operate, opening hours, etc?
Of course this is not an exhaustive list of everything that you should consider. You’ll also need to reflect upon your future plans for your business, and think about whether any lease terms will help or hinder that progress.
Leases are usually a long term commitment, so before signing anything you should make sure your lease is right for you.