Three Questions a Baker Should Ask When Entering Into a Commercial Lease

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Table of Contents

• Will my rent increase?
• What is the permitted use of your premises?
• When are the handover and commencement dates of the lease?
• Conclusion

When you purchase a bakery, you may be required to enter into a commercial lease to operate your business. Generally speaking, a commercial lease is an agreement that gives you (the baker) exclusive possession over the premises for a certain period of time to sell your bread, cakes and other delicious baked goods.

Prior to signing any agreement, it is important to speak to a leasing lawyer. Entering into a lease with terms that are harmful to you or do not match your business’ goals or expectations can have a significant negative impact for a bakery.

As a baker you should be asking the following questions when entering into a commercial lease:

Will my rent increase?

The cost of rent is an important aspect of a commercial lease for any business. It is important to note that rent rarely stays the same for the whole duration of a lease. There are 3 common ways in which a lease may increase in rent:

• A fixed rate increase involves a rental increase at a fixed rate or percentage on a yearly basis. For example your bakery may be required to pay $15,000 for the first year and the rent will increase by a fixed percentage, for example, an increase of 4% each year throughout the course of the Lease.
• Review to market is a type of review based on a calculation of the current market rent by a property valuer, real estate agent or the landlord.
• Consumer Price Index, or CPI is a review based on changes in the price of goods and services in a specified state or capital city (say New South Wales, Sydney) and usually takes place on a yearly basis.

The amount of rent you may have to pay can affect your ability to remain profitable, so it is sensible to speak to a leasing lawyer before being locked into any agreement.

What is the permitted use of your premises?

The lease you enter into will describe the permitted use of your premises. As a baker, it would be impossible to run your business if you are not allowed to use ovens and to bake within your store. As a baker, you require access to your bakery as early as 3am in the morning to bake your first batch of bread.

Some commercial leases restrict the hours of access to the Premises, so it is important to ensure that clauses dealing with permitted use in a commercial lease are consistent with the needs of your bakery.

When are the handover and commencement dates of the lease?

There are two important dates a tenant should pay particular attention to in a commercial lease. The ‘handover date’ refers to the day when the premises will be physically handed over (eg. receiving keys and access to the premises). Once the landlord has allowed you to take possession of the premises, you will be allowed to make certain fit-outs to your premises to make sure you are ready for business. In some cases (but not all) the tenant does not usually pay rent during this period, though insurance during this period is a month.

It is important to ensure that your commercial lease allows you to make the necessary fit-outs you need to run your business. If you are not permitted to install an oven or any other concentrated heat sources, then your bakery won’t be able to bake! If you are operating in a shopping centre, you should be aware that centre management usually prohibit the use of power tools during business hours and can restrict the hours of operation to your business. This may delay your renovations and prevent you from opening on time.

The lease ‘commencement date’ is when a lease will begin. If you do not renovate your shop before the commencement date of a lease, you may still be forced to pay rent. That is why it is sensible to speak to a leasing lawyer about appropriate handover and commencement dates. You can also negotiate things such as rent free periods and the landlord’s contribution to your fit out.

Conclusion

Are you considering starting a bakery? Speak to one of our leasing lawyers today. Our team of leasing lawyers have extensive experience in negotiating leases for lessees. Call LegalVision on 1300 544 755 and get a free quote today.