There are significant legal and financial concerns when entering into a commercial lease. As a tenant, there are many things you need to consider before signing any lease agreements, as outlined below.

Permitted use

Permitted use clauses do not feature in all commercial leases. If your lease agreement has a permitted use clause, your property lawyer should negotiate on your behalf so that it is broadly drafted.

A flexibly drafted permitted use clause allows for business growth and diversification, as well as an easier sale of business or assignment of lease in the future. Here are some essential questions you should try to answer before entering into a commercial lease:

  • Can my business thrive under the permitted use clause?
  • Is the clause subject to change?
  • Will any exclusion provisions apply?
  • What restrictions will be imposed on a buyer or assignee if I sell or assign in the middle of my term?

Rent

Apart from making sure you have sufficient funds to meet your regular rental obligations, consider the following:

  • On what basis rent is paid, i.e. monthly, weekly, fortnightly;
  • What is the vacancy rate in the nearby premises/your premises?
  • Is it possible to have your property lawyer negotiate a rent-free period during the fit-out stages?
  • Can the landlord make a contribution to provide an incentive to enter the lease?

Rent reviews

When considering the leasing expenses, keep in mind annual rent reviews. The rent is usually re-evaluated using any of the following methods:

  • Market rent review – This method evaluates the current market rental value, and is conducted by a specialist retail valuer that both parties agree to appoint;
  • CPI adjustment or inflation – The Consumer Price Index or inflation rate forms the basis for this method of rent review and is typically assessed depending on fluctuations in rental value in a specific geographical area; or
  • Fixed amount/percentage – This method involves increasing the rent by a set amount or percentage each year for the duration of the term of the lease. This allows for ahead-of-schedule calculations to be made for the entire rental commitment.

Irrespective of which method the parties agree to use:

  • The lease terms should explain how often, and under what method, rent reviews will take place;
  • The base rent cannot change more often than 12 months after the first anniversary of the lease commencement date; and
  • No states allow for ‘ratchet clauses’, which aim to prevent decreases in rent following a market rent review.

Lease term

The term of your lease needs to be long enough to allow your business to make sufficient revenue to become profitable. After all, entering a lease is an expensive venture.

For the more established businesses, the reputation (goodwill) depends on having a stable and secure site, which requires a longer lease term. Another benefit is that longer leases allow for more flexibility when it comes to negotiating the cost of the rent. Startups and small businesses will not enjoy this same level of bargaining power and may have to settle for a shorter lease.

Conclusion

Our leasing lawyers have assisted many small businesses in the drafting and reviewing of their leasing documents, as well as with on-going negotiations with their landlord. If you wish to speak with one of our experienced leasing lawyers, contact LegalVision on 1300 544 755.

James Douglas

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