Are you looking to start your cafe or expand your existing one? If so, you’ll need to think about how you will lease your new business’ premises. Before entering into any lease documentation, you should take care to understand what type of lease your business will require. Below, we step you through some commercial leasing basics including what your lease should include and any restrictions on use.
What Kind of Lease Do I Need?
As a cafe involves selling and providing goods and services to the public, you’ll require a retail lease. A retail lease sets out the rights and responsibilities of the owner of the retail premises (the ‘lessor’) and the party who wants to rent the premises to run their business (the ‘lessee’). Each state and territory has its own Retail Leases legislation which places obligations on lessors about the lease’s terms and disclosure of information, namely:
- The lessor must provide the lessee with a proposed retail lease; and
- The lessor must provide the lessee with a ‘Lessor’s Disclosure Statement’.
These documents allow you to review the terms of your retail lease before entering into any agreement. As a lessee, you are in turn required to provide your lessor with a Lessee’s Disclosure Statement within seven days of receiving the Lessor’s statement.
What Should My Lease Agreement Include?
Before entering into any retail lease, you should ensure that it addresses the lease’s ‘terms and conditions.’ Typically, you can find these in a ‘term sheet’ or ‘Heads of Agreement’.
The Act regulates certain terms of the lease including duration. For example, retail leases in most states must be at least five years, including options to renew (except Queensland, which has no minimum term). However, there are other terms which the lessor and lessee must negotiate.
Changes in rent prices can be daunting for many business owners. Retail Leases legislation ensures that clauses providing for rent review are fair and reasonable. For example, in NSW rent can generally only increase once every 12 months, and only one method of review can be used. Retail Leases legislation include the following methods:
- Fixed increases by an agreed amount over an agreed period;
- Market review, where rent is adjusted to reflect market rates in the area; and
- Consumer Price Index (CPI) method, where rent increases as the CPI does.
Legislation also prohibits clauses stating that the lessor can’t reduce the rent below the current level (commonly known as ‘ratchet clauses’). This is an additional protection that you must be aware of to ensure you don’t enter into an invalid lease which will threaten your business’ success.
Outgoings are additional expenses that you can incur when running your business. Before entering a lease agreement, it is important to understand what specific outgoings you are liable for. Different states may allow or disallow lessees from incurring certain outgoings.
Common outgoings can include utilities (such as water and electricity). However, some can be more complicated. For example, land tax cannot be passed onto lessees in Victoria, Queensland and South Australia. Additionally, it is important to note how these outgoings will be calculated. In the instance of land tax, you will need to know whether the outgoing will be calculated on a single holding basis (where the lessor owns no other land) or a multiple holding basis (where tax is calculated on the combined value of all land owned by the lessor).
Lessors can further protect themselves by requiring a security deposit or a bank guarantee (where the bank commits to pay the lessor the amount of the guarantee if the lessee fails to uphold the lease agreement). Parties negotiate the amount of money the lessee must provide as a deposit/guarantee, and its purpose. In practice, the security deposit or bank guarantee is typically between 2 – 3 months rent.
What Restrictions Can a Lease Place on my Use of the Property?
A lessor can also include covenants in a lease which restrict how a lessee can use the property. These are set out in the Permitted Use of Premises.
A lessee might not be able to alter or expand their business if Permitted Use clauses are:
- Too broad; or
- Too narrow.
For example, strict rules limiting signage and advertising on your premises could cripple your growth. So, it’s important to understand and carefully negotiate what is and isn’t allowed under your lease.
Will the Property’s Location Affect my Commercial Lease?
Your cafe’s location is critical to its success and can be the key to attracting (and retaining) a loyal customer base. However, where you choose to set up your cafe can affect the nature of your lease as well as how you run your business.
It’s important that you consider the zoning and development rules of your property’s local council. You may find that you need development approval before you can fit out your cafe with the necessary fixtures and fittings (such as commercial kitchen equipment and coffee machines). As such, how long it takes to get the necessary approvals may be another expense to consider when negotiating the terms of your lease.
We know that opening up a cafe is an exciting and daunting process, so it’s important you understand any agreement before signing. If you have questions about drafting or reviewing your cafe’s commercial lease, get in touch with our commercial leasing lawyers on 1300 544 755.