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Commercial leases are a considerable financial obligation. You should carefully consider the commercial realities before making the commitment.

Commercial leases: top 10 tips for lessees

Commercial leases are a considerable financial obligation. You should carefully consider the commercial realities before making the commitment.

The world of commercial leasing can be overwhelming. There are many factors at play, particularly if you have never leased before. And even if you are a seasoned lessee, commercial leases can still be daunting. The lease agreement covers a multitude of issues and can hover anywhere up to 50 pages or more, depending on the complexity of the agreement.

So, what are the essential things you need to consider when leasing a new business premises? Below, we take you through our TOP 10 TIPS when entering a commercial lease.

1. HEADS OF AGREEMENT: A Heads of Agreement is a summary of the commercial terms and conditions agreed between the lessee and lessor. It is commonly prepared by the lessor’s real estate agent and details the provisions to be included in the legal document. Be sure to check the Heads of Agreement thoroughly to ensure it accurately reflects the agreement reached.

2. PERMITTED USE: It’s imperative that the permitted use on the lease sufficiently describes what you intend on using the premises for. This applies for both now and in the future, as you may not be able to change, expand or diversify your business. As a lessee, you should seek a broad description of the permitted use. Also look out for stringent provisions on signage, as this can have a fundamental impact on your business’ marketing and stunt its growth.

3. RENT AND OUTGOINGS: Is the lease gross or net? It’s important to understand the lingo, as there is a stark difference. In a gross lease, the lessee does not contribute to extra charges for outgoings and expenses associated with the premises. In a net lease, the lessee does contribute to extra charges. These can include land tax, council rates, water rates, insurances and strata levies. As the lessee, you should negotiate rent and outgoings and be clear on what you are responsible for.

4. RENT REVIEW: Typically, rent is reviewed annually on each anniversary of lease commencement date. There are various methods used for rent reviews. Most commonly, increases are by the Consumer Price Index (CPI), a fixed percentage or current market rates. Rent may also be reviewed upon renewing the lease for a further term. You should consider how much rent increases will add up to in the long run and negotiate the lease terms keeping future costs in mind.

5. TERM: Be clear on the term of the lease, it will determine how long you can operate your business from the premises. Does the duration allow enough time for you to properly establish your business? In fitting out the premises, you may incur considerable costs. You don’t want to have to move and incur relocation and set-up costs just as you are getting on your feet.

6. OPTION TO RENEW: In your negotiations, consider asking for an option to renew the lease for a further term. As the lessee, an option to renew is to your benefit as it gives you flexibility to stay in the premises for an extra period if business is going well, without having to lock into a longer term from the outset. In taking up the option, bear in mind when and how are you required to exercise it. Commonly, an option to renew must be exercised in writing 3 to 6 months prior to the end of the lease.

7. SECURITY DEPOSIT: A lessee is generally required to provide security in the form of either a cash deposit or bank guarantee. You should negotiate the amount keeping your business’ cash flow in mind. A security deposit is usually 2 or 3 months’ rent. If a bank guarantee is to be provided, the lease will prescribe certain requirements, including whether the bank guarantee is open-ended or has an expiry date.

8. GUARANTOR: If the lessee is a company, the director(s) of the company may be required to guarantee the lessee’s obligations under the lease. This protects the lessor if the lessee is unable to meet its obligations. In such circumstances, the director(s) will be personally liable. If there is more than one director, they are typically jointly and severally liable to the lessor.

9. PERMITS AND LICENCES: As the lessee, it’s up to you to make sure that your use complies with council’s requirements. Before conducting business from the premises, you need to have the necessary permits and licences in place from local council and any other government authority. This includes a development application and an occupation certificate. Don’t get stung! Be sure to make enquiries with the relevant authorities before signing the lease. You can also ask the lessor to include a provision in the lease, making it subject to obtaining the requisite approvals.

10. REPAIRS, MAINTENANCE AND MAKE GOOD: Repairs and maintenance are the lessee’s responsibility, together with keeping the premises clean and tidy. However, the lessor is responsible for any structural work. At the end of the lease, the lessee must make good any damage to the premises and remove its fixtures and fittings.

Commercial leases are a considerable financial obligation. You should carefully consider the commercial realities before making the commitment. It’s therefore imperative you understand the lease agreement before signing. So, here’s our BONUS TIP…

GET THE RIGHT ADVICE:  Engaging a business lawyer with the right expertise will provide you with invaluable advice, support, insight and industry knowledge to help you navigate through the process.

If you’re looking at entering a commercial lease, get in touch. We’ll give you a fixed quote, and then get straight down to business.

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