A commercial building lease involves a significant commitment for both the landlord (lessor) and tenant (lessee). It is all too easy to make mistakes that are difficult to “undo” or solve down the track. It is important to seek legal advice prior to you signing a commercial lease and that every clause is reviewed to ensure that you do not end up facing financial or legal difficulties down the track.
Here are some of the most common mistakes we see on behalf of buyers:
Zoning
It is important that before entering into a lease you check with the local council to ensure that your intended use of the premises is permitted under council’s zoning & development requirements.
Failing to do checks
Whilst it may seem obvious, buyers should ensure that they investigate to ensure buildings and improvements are compliant with local, state and federal requirements.
Negotiate key terms that are beneficial to you
The amount of rent to be paid is not the only key term to be negotiated. Other important considerations to be negotiated before signing a Heads of Agreement/Lease Proposal include:
- Rent reviews – the methods of rent review are determined by agreement between the parties can be by way of fixed rate increase, determined by CPI or by market review. The method applied can make a big difference to the rent payable at each date provided under the Lease for the rent to be reviewed.
- Term of the lease – you may be committing to a 5- or 10-year lease and should do the math to help you decide if you will be able to meet your obligations over the entire term.
- Outgoings – these are essentially the costs you are obliged to pay which can include water, electricity, cleaning costs, land tax etc. Sometimes there is no separate charge for outgoings. If you are required to pay all or a proportion of the outgoings it is crucial to obtain an estimate and to identify precisely what outgoings you are agreeing to pay.
- Options to renew the lease – the frequency and term of each option to be renewed. This will give you more flexibility if the business is going well to then renew the lease on the terms which have already been agreed upon.
- Subleasing/rights of assignment limitations (a sub-leasing clause can provide reassurance should the business fail, or repayments become impossible, whilst a right of assignment clause enables a tenant to transfer the lease if they decide to sell the business.
- Security deposits/bank guarantee provisions – the amount required by the landlord can vary to cover for e.g. an amount representing 3-6 months’ rent plus GST.
- Make good provisions – this can be costly to a tenant depending upon the extent required by the landlord of make good work required to be undertaken to the premises at the end of the term of the lease or in the event of default under the lease or even on various dates during the term of the lease.
- Legal costs – generally these days, the parties agree to each pay their own legal costs in relation to the lease however on occasions the landlord will require the tenant to pay not only the tenant’s own legal fees, but also the landlord’s legal fees. This should be negotiated so that you do not pay the landlord’s fees or at the very least, the amount to be paid is capped.
Failure to give proper consideration to these issues may be detrimental to your business.
Signing the Heads of Agreement/Lease Proposal without legal advice
A tenant should ensure that their lawyer reviews the Heads of Agreement/Lease proposal prior to signing same and can suggest amendments thereto in an effort to protect your interests. Once signed, the landlord’s lawyer will prepare the Lease incorporating the agreed terms set out in the signed document and it will generally be too late to negotiate such terms if they are unfavourable to you. Do not skim over the details. It is imperative that you know precisely what your responsibilities will be for the length of the lease. Do not assume something is included in the Lease. For e.g, you may be expected to upkeep the air conditioning equipment. Also, not all car parks/garages/parking spaces on the property are included in the Lease and you may find yourself paying for these elsewhere. There could also be additional clauses providing for fit out restrictions or access hours to the premises or requiring certain operating hours for the business.
Failing to seek legal advice before entering into the Lease Agreement
The next step is to arrange for a lawyer to carefully review the Lease, advise you in regards thereto and suggest/negotiate amendments to be made to the Lease in an effort to protect your interests.
For more information, contact Rockliff Snelgrove Lawyers on (02) 9299 4912.