The tenant’s perspective: Should I enter a short or long term commercial lease?

There are a number of important legal and financial considerations when deciding whether to enter into a long or short-term lease with your landlord. Importantly, you should discuss these considerations with a leasing lawyer, especially when negotiating the terms of the commercial lease agreement. Here are some of the pros and cons of short-term and long-term leases:

Benefits of long-term leases

• If you wish to establish your business in the same location, and build up your goodwill and reputation in the area, long-term leases are perfect for this. This means that if the premises are sold to new owners, your tenancy will not be at risk.
• The longer the lease, the easier it will be to work out exactly what you will spend in the future, subject to outgoings and rental increases, noting these items are covered in your lease.
• Another obvious benefit of longer commercial leases is that the landlords will inevitably be more flexible at the negotiation table. This fexibility may come in the form of a contribution to the fit-out (if you plan on fitting out the premises), or perhaps a longer rent-free period. Otherwise there may be room to negotiate more favourable exclusivity clauses. While it is still possible to negotiate these concessions in shorter leases, it is often more difficult to do so.

Disadvantages of long-term leases

There are also some more disadvantageous elements of long-term leases. For example:

• the negotiations can be more complex;
• the costs involved in maintaining and repairing the property in a long-term commercial lease can be much higher; and
• for some businesses it is more risky to enter these longer-term commercial leases, as they may not have the financial viability to meet the rental obligations.

Benefits of short-term leases

Short term leases can be beneficial if:

• your business is just starting up;
• you are unsure what kind of success you will have in the future, a short-term commercial lease will allow for scalability, either up or down, and changing to a new location depending on your financial situation. In this situation, short-term leases also benefit businesses looking to gauge the level of activity in the market.

In summary, it is worth keeping in mind that 4 out of 5 business will fail by their 5^th year. This means that a short-term commercial lease will at least offer an exit for business that cannot afford the financial risk involved in longer-term leases.

Disadvantages of short-term leases

• It can cost a huge amount to relocate once a short-term commercial lease has come to an end, including make good of the premises. This is something to consider when choosing a short or long-term commercial lease.
• Another factor to consider is the security of location. This is clearly not protected under a short-term lease, which may put the business’ goodwill at risk. This might result in the business failing to build up a solid clientele because you are constantly changing locations.

What about retail leases?

Commercial leases operate differently to retail leases. All states, except Queensland, provide that retail leases are 5 years minimum including any options to renew (under the relevant state legislation). Retail leases operating for less than 5 years will be automatically adjusted to become 5 years.

Why flexibility in negotiations is so important

The idea, when negotiating the terms of your short or long-term commercial lease, is to be flexible with your approach and make certain concessions. If you and your landlord want different things, try and find a middle ground that works for both parties. If you want a long-term lease and the landlord wants a short-term lease, why not use options to accommodate both parties. For example, an initial term of 3 years plus an option for 3 additional years might be more appropriate than an initial 6-year term.

Conclusion

If you are negotiating with your landlord the terms of a commercial lease, it is extremely important that you consult legal professionals before you enter any commercial lease agreement. For legal advice on the kind of terms you should be negotiating, contact LegalVision on 1300 544 755 and speak with one of our experts in leasing law.