Negotiating the commercial aspects of a lease can be challenging if you are the tenant. Generally, landlords in Australia hold much of the power in a lease negotiation. However, this does not mean that the tenant is unable to negotiate commercial terms. This article outlines how you can prepare to negotiate the commercial aspects of your lease with your landlord or leasing agent.
Term and Further Terms
Think about how long you need to stay at the premises and whether this may change in the future. A lease is a binding contract. Unless there is a specific clause that permits you to do so, you cannot end your lease for convenience’s sake. Trying to end the lease early will have financial consequences, so you should make the decision to enter into a long term lease carefully. Instead of entering into a long lease, it might be advisable to enter into a shorter term lease with options for further terms. An option allows you to stay on when the term of your lease ends without negotiating a completely new lease. This can give you flexibility later when deciding whether to stay or move on.
Generally, the more options there are in your lease, the more flexibility you will have. You do not have to exercise an option to stay when the term ends but you will be able to stay if you would like to. Once you decide not to exercise an option, however, all future options fall away.
Rent and Rent Reviews
You should do your research to ensure that you are being charged a fair rent rate. Look at the market rent rate in the area and market rent rates for businesses similar to yours. This information can help you to negotiate a fair price with the landlord. You should also consider whether or not the rent will be varied and, if so, how often and by what method.
Normally, the rent in a commercial lease is reviewed annually. Exercising an option to renew your lease is also likely to trigger a rent review. If your rent will be varied, your lease should specify the exact dates or events that will cause a rent review and the method that will be used to calculate how rent will be varied.
Landlords typically use three different methods to calculate an increase in rent. Your rent may change according to:
- a fixed percentage increase (this is where rent increases by a set percentage on specified dates during the term of the lease);
- the consumer price index (CPI) (this is where rent increases according to changes to the CPI); or
- a market rent review (this is where the landlord assesses your rent according to the market).
As well as rent, your landlord will probably also require a security bond from you to protect themselves against a default. A default occurs when a tenant fails to perform any of its obligations under the lease, such as not paying rent on time. A security bond is typically equivalent to three to six months’ rent and outgoings. The bond may be a:
- security deposit;
- bank guarantee; or
- personal guarantee.
If the tenant is a company, then the landlord may also require personal guarantees from the company’s directors. Providing a personal guarantee means that personal assets like your house and car may be at risk if the business fails to pay its debts. Many people avoid giving a personal guarantee by establishing a company that separates their business and personal assets. Alternatively, you may be able to increase the amount of a bank guarantee or security bond given under the lease.
Fit Out Incentives
- paying to fit out of the premises;
- contributing towards your costs of fitting out the premises;
- providing a rent reduction for the initial period of the lease (such as reduced rent for the first 12 months); or
- providing rent abatement for the initial period of the lease (such as giving you the first three months in the premises rent free).
Outgoings refer to the landlords costs of operating and maintaining the building. They are costs that your landlord will first incur and then pass on to you. Outgoings usually include:
- charges; and
They should not include capital improvement costs.
Make good clauses outline how the tenant must leave the premises when the lease ends. Your obligations under a make good clause can range from minor to major works. It is important to have a clear understanding before entering a lease of what make good works will be required. If you must return the premises to their condition as at the start of the lease, you should undertake an initial condition report. A condition report will document the exact condition of the premises, using:
- video recordings; and
- a written report.
Termination and Exit Clauses
Almost all leases will give the landlord the right to terminate the lease if you breach any of its terms. You should try to ensure that your landlord must give notice of any breach before it can take action to terminate.
When negotiating the terms of a commercial lease, you should consider the contract as a whole. The more thought you give now to your future needs, the better off you will be in the long run.
Working out which issues are most important to your business should be done before the lease is drafted so that these issues can be included upfront and not negotiated at a later stage. If you need help negotiating the commercial terms of your lease, you can contact LegalVision’s commercial leasing lawyers on 1300 544 755.
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