You have an amazing business idea, and now you have found an excellent premises to open up shop (Premises).
All that stands in your way of a thriving new business is the landlord and negotiating a favourable commercial lease for the Premises.
The following tips will help you prepare for your meeting with the landlord or leasing agent and confidently negotiate your new lease.
Do your homework. What are the rentals like in the proposed area of the premises you wish to rent?
It is handy to work on costs per square metre.
Keep in mind GST will usually be payable on top of rent.
2. Rent Review
A Rent Review is either of the following options (or sometimes a combination of them):
- Consumer Price Index Increase;
- Fixed percentage increase (for example, 4% each year); or
- Market review
Make sure you aren’t paying too much. Over the course of a five-year lease, fixed price increases of 5% a year can see the rent increase 25% over the term of the lease.
3. Term of the Lease
There are advantages and disadvantages to having a long term lease. On the plus side, a long-term lease provides you with security and the ability to build up your business and make it a saleable asset.
The disadvantage is that if the term is too long, and you expand your business you might outgrow the Premises.
Make sure the length of the lease is right for your circumstances.
4. Will you need to fit out the Premises?
Do the Premises need a fit out? If so, what will it cost?
Sometimes the landlord will either pay for the Fitout or provide a combination of a lease incentive payment and/ or rent-free period to assist with the costs of fit out.
Make sure you consider these hidden costs and ask the landlord for a lease incentive payment and rent free period.
5. Permitted Use of the Premises
What is your proposed use?
Negotiate the permitted use to be as broad as possible to account for the fact that in the future your business may diversify, or you may want to sublease some of your space. Without a broad permitted use this may not be possible unless the lease is varied.
6. Assignment and Subletting
You should ensure that your lease allows you to sell your business and assign the lease or sublease part of the premises.
Most landlords will allow this, subject to several conditions.
7. What are the outgoings/ operating expenses?
If the landlord is passing on the Outgoings (or operating costs) to you, and is charging separately for these services, negotiate a fixed-fee or cap on the amount. Also, make sure the landlord is transparent and discloses these expenses to you before you enter into the lease.
8. Alterations or Improvements
Most leases state that a tenant cannot make any changes or improvements without the landlord’s consent.
Ask for a clause that gives permission to particular works if you require a Fitout of the premises, with the landlord’s consent.
9. Make Good and Refurbishment
Be aware of a clause that states that at the end of the lease, the premises must be returned in their original condition. Some leases only say that you must return the premises in the condition they were in at the start of the lease. Other leases impose redecoration obligations that extend to re-painting and re-carpeting premises and can be onerous.
Make it clear who will pay the lease preparation costs.
Ideally, each party should bear their own costs and in the case of a retail lease, Retail Lease Legislation in each state and territory prohibit the landlord from passing on these costs. There is no such restriction in commercial leases, and all prospective tenants should be aware of this.
Can LegalVision help you?
Renting a commercial property is a business transaction, and you should make the decision carefully, with professional assistance. The cost of your business lease is likely to be one of the biggest overheads you have.
A commercial lease usually involves a long-term commitment, so it is critical to get the right premises on the right terms, or it can prove to be quite a costly exercise. Call us on 1300 544 755 to obtain advice from one of our leasing lawyers.
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