What Are The Additional Costs Associated With A Commercial Or Retail Lease?

If you are considering entering into a commercial or retail lease, you will likely be aware of the many expenses under the lease. However, you may not be aware of the additional and incidental costs that also come with a lease. Failure to meet expenses under a lease can result in a default of the lease and incur many costs. It is therefore important that you are fully aware of all possible expenses. This article will discuss the hidden and incidental costs associated with commercial and retail leases. These expenses are incurred during both the preparation of a lease and during the term of a lease.

Landlord’s Legal Costs

For commercial leases, it is not uncommon that you will 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.

However, for retail leases, Australian law prohibits the landlord from being able to pass on lease preparation expenses to a prospective lessee.

Your (Lessee) Legal Costs

There are also your fees for obtaining independent legal advice for the lease.  They will vary from firm to firm. However, some firms (like LegalVision) operate using fixed fees instead of the hourly billing system. If you plan to engage a leasing lawyer, check to see what pay structure the firm uses. This can help limit your hidden expenses.

Production Fees and Consent of the Mortgagee

For a lease to be registered, the landlord’s mortgagee (the party financing the landlord, usually a bank) is usually required to give consent.

In giving its consent, a mortgagee will usually charge a fee. The landlord may try to pass this cost onto you. However, this is a matter for your leasing lawyer to negotiate with the landlord. If one of the terms of your lease is paying for the mortgagee’s consent, you should ask 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.

Registration fees

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 the NSW Land Registry Services however this will vary from state to state. Once registered, the lease will be noted on the title to the property. This protects the lessee’s rights to the property.

Rent and Outgoings

You should be aware that it is not just rent that is payable under a lease. Often the landlord passes on outgoings to you. Outgoings are the landlord’s expenses of running the building, such as council rates and cleaning. These are generally costs that are additional to the rent.

Additionally, most leases contain a rent review clause. This increases the rent each year during the term of the lease and any option periods. Commonly, rent review clause increases are:

• calculated using inflation rates or the Consumer Price Index (CPI);
• a fixed percentage increase; or
• calculated by market review.

It is important to be aware of these hidden (future) costs when reviewing your lease.

Costs for Fitting Out the Premises

Finally, you will often need to cover the cost of fitting out the premises to your requirements. This can cost tens of thousands of dollars. Some landlords contribute 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.

Key Takeaways

The costs associated with a lease vary from lease to lease. However, you should be aware of all hidden and incidental fees associated with the lease. This includes:

• legal costs
• registration costs
• rent and ongoings; and
• the cost of fitting out the premises

If you have questions about the terms of your commercial or retail lease, get in touch with LegalVision’s leasing lawyers on 1300 544 755 or by filling out the form on this page.