When entering into a commercial lease, you want to ensure that:
- the premises are suitable for your proposed use;
- the local council zoning laws allow for your proposed use; and
- you understand the terms of the lease.
A lease is a significant financial commitment, so you should review your commercial lease before signing it. This article provides a checklist outlining what you should consider before entering into a commercial lease agreement.
What is the Permitted Use of the Premises?
Before entering into a commercial lease, you should check with the local council that you can operate your business from the leased premises. If your business is not currently zoned for the premises, you may be able to lodge a development approval with the council to have your proposed use of the premises approved.
If you require development approval, then you should check your lease documentation to ensure the lease is conditional upon the approval. Then, if the council rejects your development approval, you will not be required to enter into the lease. If you do not have council approval and enter into the lease, you will still need to fulfil the terms of the lease, such as paying rent, despite not being able to operate your business.
What Costs Are Payable?
Your commercial lease should specify what costs you will need to pay. Commercial leases do not have the same protections as retail leases. This means the landlord may try to recover all sorts of costs and outgoings from you.
Specifically, look out for whether outgoings are noted in the lease agreement. You should always request a breakdown of likely outgoings if they are payable in addition to rent.
Are There Incentives?
A lease incentive is often used to entice tenants. Incentives offered include a:
- rent-free period;
- rent reduction; or
- fit-out contribution.
Where there is a rent-free period, a landlord will usually allow for the period to cover the fit-out period. However, landlords may offer an extended rent-free period if you are entering into a long-term commercial lease.
A rent reduction is applied throughout the lease and reduces each monthly payment. If your lease offers a market rent review, the rent review will be assessed based on the full rental amount.
Finally, a landlord may contribute to the tenant’s fit-out works as agreed upon in the incentive deed. When your landlord pays these costs depends on the terms in your agreement.
Each of these incentives has different tax implications. Generally, these incentives will include a clawback or payback provision in the lease, which requires you to repay the amount after triggered by a particular event.
Do I Have to Provide a Personal Guarantee?
Depending on the type of security the landlord offers, you may need to provide a personal guarantee or director’s guarantee. If you are entering into the lease using a limited liability company as the tenant, your landlord may request a personal guarantee from the company directors. Providing a personal guarantee can place your personal assets at risk, especially if you have issues with paying rent. You should consider other alternatives, such as:
- negotiating with your landlord to increase the security deposit or bank guarantee; or
- reducing your liability under the personal guarantee by agreeing to a certain amount.
You can refuse to provide a personal guarantee. However, the landlord may require one before you sign the lease. You may want to seek financial advice before providing this type of guarantee.
Before entering into a commercial lease, you should ensure you have considered whether you:
- are permitted to use the leased premises;
- will receive a lease incentive; and
- need to provide a personal guarantee.
If you have any questions, contact LegalVision’s leasing lawyers on 1300 544 755 or fill out the form on this page.
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