Before entering into a retail lease, you should ensure you have a thorough inspection of the premises and understand the lease agreement. You may be locked into the lease for a lengthy period, so you should be confident the premises are right for you and your business. This article provides a checklist for what you should check before entering into a retail lease agreement.
Do You Know Your Disclosure Obligations?
Before the landlord provides you with your final lease agreement, they should give you a disclosure statement. Under the disclosure statement obligations, the landlord must give you the key terms of the agreement before you enter into the lease.
Generally, the landlord needs to provide you with this statement at least seven days before signing the lease. However, this can vary depending on which state or territory you are based in.
You should review the disclosure statement, as it outlines the outgoings and extra costs you will need to pay for the duration of the lease. Furthermore, the statement should identify any additional hidden costs that you may not be aware of.
What is the Permitted Use of the Premises?
Your disclosure statement will set out the landlord’s permitted use for the premises. You should check this with your local council to ensure the type of business you are running is suitable for the premises. If not, you can ask the council whether a development approval is required.
If development approval is needed, you should ensure any lease documentation you sign 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?
Typically with retail leases, your landlord cannot pass on to you their costs for preparing, negotiating or finalising the lease. However, you will be required to pay for the outgoings of the premises, such as land tax and any fire safety maintenance.
Are There Incentives?
Landlords often use lease incentives to entice tenants. Incentives offered include a rent-free period, rent reduction or a 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 for long-term retail leases.
A rent reduction is applied throughout the lease and reduces each monthly payment. You should be aware that the rent reduction does not affect any form of a market rent review.
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 have 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 Need to Provide a Personal Guarantee?
If you are entering into a retail lease with your company entity, your landlord may request a personal guarantee from the company directors. The personal guarantee may place your personal assets at risk. Therefore, it is worth considering 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 offer a personal guarantee. However, your landlord may require it before allowing you to sign the lease agreement. You may want to seek financial advice before providing this type of guarantee.
Before entering into a retail lease, you should ensure you have considered whether you:
- know your disclosure obligations;
- 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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