First Time Commercial Lease? What are the Issues to look out for?

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• Premises
• What are the tenant’s rights under the lease?
• Initial Term and Option to Renew 
• Rent Review
• Costs
• Conclusion

Dipping your toes into the world of commercial leasing can be equally exciting and daunting. Exciting because a commercial lease generally means the start of a new business venture and the chance to be your own boss.

Daunting because the legal jargon can be hard to understand. Here at LegalVision, we help you uravel the legal jargon. The following is a handy guide about matters to consider when you are thinking about entering into a commercial lease.

Premises

• What is the right Premises for you?
• Have you considered the tenancy mix and competition close by? For example, if you sell tea and a shop that sells tea is already in a shopping centre, it may not be the best location for you.
• If you do negotiate a lease because a centre or Premises is the right tenancy mix, try to negotiate an exclusivity clause in your lease so that another tenant selling identical products to you can’t set up shop next door.
• Sometimes a shop near a department store or supermarket (an “anchor tenant”) is a good place to set up shop because it guarantees a lot of foot traffic past your premises.
• Ensure you can use the Premises for your business and you are not restricted by the “permitted use” of the Premises. You may also need to make enquiries with the Local Council to ascertain whether you need development consent for the Permitted Use.

What are the tenant’s rights under the lease?

• The lease will set out the rights and obligations of both the tenant and the landlord.
• It is important to read the lease carefully and obtain independent legal advice on the lease to ensure that you can use the premises to operate your business.
• It is also crucial that the lease set out all items agreed with the landlord. Most leases contain “entire agreement” clauses and this means that any other matter previously agreed but NOT included in the Lease cannot be enforced unless it also forms part of the lease as a special condition.
• Things that may form part of an agreement in a lease or special conditions to a lease are:
  • Car parking;
  • Make good;
  • The right to erect signs and advertising;
  • Use of common facilities and areas;
  • Who pays for the outgoings and air conditioning;
  • Access to the Premises; and
  • Who will conduct the Fitout work to the Premises.

Initial Term and Option to Renew 

• Ensure you negotiate the perfect term for you. In some cases this may be a short term (if your business is growing and you think you might need to move) but in other cases this could be a long term with lease options to provide security of tenure in the Premises.
• The lease term is often an important consideration if you are looking to sell your business in the future as it can impact upon the goodwill and sale price of your business.
• Option terms are a good way to provide flexibility as it is at your election to exercise the option, noting a lease will contain time frames under which the option must be exercised.

Rent Review

• Rent review is crucial.
• Generally the rent will increase on the anniversary of the lease each year. However, there are a number of methods that can be applied in this regard.
• Consumer Price Index (CPI), Fixed Percentage and Market Review are all conventional rent review methods.
• Obtain legal advice to discuss what is right for you.

Costs

• Be sure you discuss who is to pay the costs of the lease preparation. Is each party to bear their own legal costs or are you going to pay the Landlord’s costs?
• In retail leases, state-based legislation often prohibits landlords from passing on this expense but this is not the case in commercial leases, so be clear on your obligations at the outset.

Conclusion

The above points are only some of the issues you must keep in mind when negotiating a commercial lease. For more information about commercial leasing, get in touch with LegalVision on 1300 544 755. Our leasing lawyers are more than happy to provide you with a fixed-fee quote.