Part 4: What are the costs of a commercial lease?

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Table of Contents

• Use
• Sub-leases and Assignments
• Insurances
• Making alterations to the premises
• Conclusion

Welcome to part 4 on “What are the costs of a commercial lease?” where we will discuss the costs of licences depending on your intended use of the premises, the cost of insurance, what to consider when making alterations, and whether assignment or sub-leasing is possible under your commercial lease.

Use

Normally, the lease stipulates what the premises can be used for, known as the ‘intended use’ of the lease. The ‘intended use’ must accurately disclose how the tenant will use the premises during the tenancy. Despite the intended use under the lease, local council may still prohibit this use due to zoning limitations. Make sure to verify whether or not the intended use is a permissible use according to the relevant local council.

Just because the local council can permit the intended use does not then mean you can operate the business. Council must approve first and provide their consent. Getting council approval will almost always be necessary; unless the previous owner used the premises in the same you intend to use them. Even then, it is worth having your leasing lawyer check with council to make sure that the previous tenant had council approval to use the premises in the way they did.

Upon enquiring with council about your intended use of the premises, check that the landlord owns the premises. If there is any doubt as to the true owner, and the name released by council is not the same party with whom you are negotiating, you’ll need to obtain proof that the party you’re with is the owner and landlord of the premises.

Keep in mind that signage for your business may need to be approved by council, especially if your signs overhang or attach to the building. Local council consent can be obtained by completing a Development Application.

On top of getting the go-ahead from council to use the premises in the way you had planned, you also need a Construction Certificate for any construction that will affect the structural integrity of the building. Don’t risk having your entire construction site shut down by council for failing to alert them of your plans.

Knowing how long each approval will take to obtain is also important for negotiating a rent-free period. It is also important to consider the following:

• Whether connecting telephone services or other services will take a long time;
• Whether there are tradespeople available to do the fit out; and
• Whether there is likely to be any delay in obtaining all necessary business stock/ stationery.

Certain businesses require specific licences, so it’s worth checking with the appropriate licencing authority.

Sub-leases and Assignments

In most cases, a commercial lease will not allow the tenant, without the prior consent of the landlord, to assign or sub-let the lease. Nevertheless, unreasonable refusal by the landlord is also prohibited. Under the Retail Lease Act, there are criteria for refusing a request to assign or sub-let. Make sure you or your leasing lawyer familiarise with these grounds of refusal.

When it comes to assigning or sub-letting the lease, the landlord will almost always require references during the selection process, especially references that demonstrate the prospective sub lessees’ financial capacity.

Following an assignment of a retail shop lease, consented to by the landlord, the outgoing lessee will no longer have any obligations under the lease. This means that if the new tenant breaches the lease terms, the landlord will have no recourse or cause of action against the original tenant.

Insurances

Ordinarily, the compulsory insurances are a public liability policy, the value of which is stated in the schedule, and a policy that covers damage to glass windows. For other circumstances, such as a fire, it is the landlord’s role to insure the property.

On top of the standard insurance requirements under your commercial lease, insurance for stock, fittings and fixtures may also be a good precautionary measure to take. Other key insurance policies worth considering include the following:

• Loss of income policy;
• Sickness policy; and
• Accident policy.

All employees must be covered by worker’s compensation insurance.

If the premises become damaged, the tenant will not be required to pay anything to the landlord until the premises are restored to their original condition. The landlord, however, is under no obligation to do so if the repair work would be unreasonable, and either party in such a situation would be able to terminate the lease agreement with notice of no less than 7 days. Neither party owes compensation if the lease is reasonably terminated, however, insurance would be necessary to account for this.

Making alterations to the premises

Structural modifications to the building must be consented by the landlord. If you know you want to make alterations down the track, speak with the landlord about this at the beginning of the commercial lease and request written approval before signing the lease. Do the same thing with any signage you anticipate you will use in the future, and don’t forget to consult council.

Conclusion

Make sure you have checked the terms of the lease with your leasing lawyer. There are numerous costs involved when entering into a commercial lease, and it would be worth seeking financial advice, as well as legal advice, to make sure you are not overlooking any of the finer details of the lease agreement.

For assistance in reviewing your lease agreement, contact LegalVision on 1300 544 755.