What should I think about when entering a retail lease?

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Table of Contents

• Size and Location of the site
• Condition of the premises
• Fit out & make good
• Outgoings
• Incentives
• Rent review
• Conclusion

There are a number of considerations to take into account when deciding whether to enter into a retail lease. Some are legal and others purely commercial, but all should be discussed in detail with a leasing lawyer experienced in drafting and reviewing retail leases.

The following factors, amongst others, should be considered:

Size and Location of the site

If you wish to compare the prices of different sites in your area, you might be able to speak with an experienced leasing estate agent who can provide a list of similar properties in the area to compare the rent prices and provide a rough guide on what the going rate is per square metre for the rental rates in your area.

Once you have decided on a potential property, ask for a copy of the survey plan. This will assist you in:

• obtaining quotes for any construction/development work or fitout required, noting the fit out of a premises can be very expensive;
• planning the fit out work required to the property; and
• knowing the precise dimensions of the space so you can compare the rental rates of similar properties in the area.

Condition of the premises

When entering into a retail lease, another crucial factor to consider is the condition of the property. Ask yourself these questions:

• Is the property in need of repairs?
• Will it require a large amount of maintenance throughout the term for which you might be responsible?
• If repairs are required, are they structural or superficial?
• Will it be necessary that, upon entering into the lease, you or the landlord will have to make improvements to the property?
• What do the terms of the lease say about painting the property at the end of the lease term (the make good)?

Have your leasing lawyer review these clauses with a fine-toothed comb for provisions relating to demolition or refurbishment clauses. These are clauses that give the landlord rights to demolish or renovate the premises if the landlord wishes to do so, meaning your lease could be cut short without compensation.

Fit out & make good

Bear in mind that you will usually be required to fit out the premises and this can be expensive.  Further, at the end of the Lease you are more often than not required to remove your fit out in full and “make good” the premises, another costly exercise.  The make good clause will usually state that you are to leave the premises in the same condition in which you leased them, certain clauses also require you to replace carpeting and re-paint either during the term at specified periods and/ or at the end of the lease term.

In some rare cases, the previous tenant leaves without taking any of their fitout. If the fitout matches your particular commercial needs, you might consider paying more rent if it means you won’t have to pay for your own fit out.

Outgoings

Outgoings are sometimes payable on top of the monthly rental amount.  Outgoings are items such as rates, taxes and operating expenses for the building such as cleaning.

You should be aware of the potential amount of the outgoings and the overall combined rental and outgoings amount under the Lease.

Incentives

Depending on the state of the market and the landlord’s success of renting the property in the past, the landlord will sometimes offer an incentive to the prospective lessee to entice them into entering into the lease, such as a contribution to the premises fit out and/ or a rent-free period.

Rent review

The initial rent under the lease will usually increase each year on the anniversary of the lease. Common methods of rent review include by way of reference to the Consumer Price Index (CPI), a fixed percentage or a review to market.  It is important to be aware of the ways in which your lease can increase rental each year and, if there is a dispute in relation to the rent review, how the lease provides for dispute resolution.

Conclusion

There are a number of legal, as well as commercial considerations when entering into a retail lease. Negotiation is extremely important when entering into a retail lease and a leasing lawyer should always negotiate on your behalf to ensure the best result.

For assistance in negotiating the terms of your retail lease, contact LegalVision on 1300 544 755 and speak with one of our experienced leasing lawyers.