Are you considering entering into a commercial or retail lease? Have you budgeted for the term of the lease and assessed whether you’re able to meet all the expenses? Failure to meet expenses under a lease can result in a default of the Lease and many hidden costs.
There are many additional and incidental costs on top of rent associated with a lease. These expenses can be seen in both the preparation of a lease and during the term of the Lease.
The article below sets out some extra costs associated with a commercial or retail lease:
Landlord’s Legal Costs
With respect to commercial leases, it is not uncommon to be required to pay the legal costs of the landlord’s lawyer in preparing the lease. This usually forms part of the Lease negotiations between the parties.
Retail leases are a little different – most States and Territories have a Retail Leases Act that prohibits the Landlord from being able to pass on lease preparation expenses to a prospective Lessee.
Your (Lessee) Legal Costs
Then there are your fees for obtaining independent legal advice in relation to the Lease. They will vary from firm to firm, however, some firms, like LegalVision, operate using fixed fees instead of the hourly billing system that has slowly become out-dated. Many firms have adapted to the changing legal landscape and the changing needs of the client, such as certainty and affordability. If you’re going to use a leasing lawyer, check to see what pay structure the firm operates under. This can be a way of limiting your hidden expenses.
Production fees and consent of the mortgagee
For a lease to be registered, consent from the Landlord’s mortgagee (party financing the landlord) is often required if a mortgage is registered on the property to be leased.
In giving its consent, a mortgagee will usually charge a fee. Although the landlord will try to pass this cost onto you, as the tenant, this is a matter for your leasing lawyer to negotiate with the landlord. If, under the agreed terms, one of the costs associated with the lease, is paying for the mortgagee’s consent, enquire as to how much this will cost. This fee is typically at least $250 to $350.
Without obtaining proper consent from the mortgagee, the landlord could be breaching its mortgage. Therefore, if the property is mortgaged, the lease will not be able to proceed without first obtaining the consent of the mortgagee who can produce the certificate of title.
Where appropriate, a lease will then need to be registered at the State Government body in charge of registering leases and property interests on the title of land – in New South Wales this is Land and Property Information NSW, however it varies from state to state.
Once registered, the Lease will be noted on the title to the property. This helps to protect the lessee.
Rent and Outgoings
You should be aware that it is not just rental payable under a lease. Often the Landlord passes on outgoings to you – which are the Landlord’s expenses of running the building such as council rates, cleaning and the like. These are generally added to the Lease on top of the rent.
Additionally, most Leases contain a rent review clause which has the effect of increasing the rent each year throughout the term of the lease and during any option periods. Commonly, rent review clause increases are linked to the Consumer Price Index (CPI), a fixed percentage increase or market review.
It is important to be aware of these hidden costs when reviewing your lease.
Fitting Out the Premises
Finally, you will often be required to fit out the premises to your requirements. This can mean tens of thousands of dollars. Some Landlords make a contribution to these expenses or offer a rent-free period of a month or two to let you get settled. It is important to factor in these expenses to your lease costs.
The costs associated with a lease vary from lease to lease but the above is certainly a guide to the kinds of fees you can expect when entering into a commercial or retail lease. If you need assistance in negotiating the terms of your commercial or retail lease or simply wish to have it reviewed by a leasing lawyer, contact LegalVision on 1300 544 755.
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