Why is it important to have a leasing lawyer look over a lease?
A lease is a legal document governing the relationship between lessor/landlord and lessee/tenant regarding a property. Leases vary in their complexity, size and terms.
It is important to have a lawyer with experience in leasing to review the lease for you and request changes on your behalf. Entering into a lease is, for many businesses, a big financial commitment, and a long-term one. Often leases are for a duration of 3 plus years with options to renew.
It is therefore imperative that the lease terms are reviewed carefully so that you understand your obligations under a lease. A retail and commercial leasing lawyer will help to ensure that necessary amendments are made to protect you, as there are financial penalties of not seeing the lease out to its full term.
In most circumstances, you can seek to assign the lease to a third party or sub-let part of the premises. However, this is not a guarantee as the lessor/landlord needs to consent to the assignment or sublease and in order to obtain their consent, you usually need to show that the third party is in a similar or better financial position to you.
Negotiating lease terms
While it may seem unnecessary or ‘over-kill’ to engage a lawyer at the negotiation stage of a new lease for business premises, too often we see clients enter into a ‘heads of agreement’ style document which sets out the main provisions of a lease, without prior consultation with their lawyer.
It is important to engage a lawyer from the outset when you are looking for new business premises or negotiating new terms for existing business premises.
Your lawyer does not need to be involved in the negotiating process – this can be between you and the agent with whom the property is listed for lease, or the lessor/landlord directly, however, you should strongly consider having a lawyer review the ‘heads of agreement’ (sometimes called a ‘Lease Proposal’) prior to signing it.
Usually, the heads of agreement is a 1-2 page document which sets out the main terms of the lease. The importance of having a lawyer review the document before you sign it, is that sometimes the heads of agreement can include terms such as you are required to pay the landlord/lessor’s costs of preparing the lease, or it may contain a harsh rent review or ‘make good’ provision.
If these matters are not picked up on or amended prior to signing the heads of agreement, it can be very difficult for your lawyer when requesting amendments to the lease documents, to seek to have these adverse provisions removed from the lease (because under the heads of agreement you agreed to those terms).
What are some of the main clauses to negotiation in a lease?
Every lease is different.
Sometimes leases are standard form leases such as the Lease terms of the Law Society of New South Wales, which generally speaking are more evenly balanced between lessor/landlord and lessee/tenant. On the other hand, some leases are lengthy and heavily balanced in favour of the lessor/landlord.
Regardless of the size and complexity of the Lease, it is still important to have your lawyer review the lease and advise you in relation to any amendments.
Some of the common clauses you may need to negotiate are:
Rent – you should check that the proposed rental is competitive with similar properties in the area and that you are not overpaying for the premises. You should also keep in mind that rent is usually exclusive of GST, that is, the amount of rent specified in the heads of agreement or lease is plus GST;
Rent review – there are three common methods of rent review, namely, a fixed percentage annual increase, an increase in accordance with the consumer price index, and a market review. What we typically see is that say for example, the lease is for a term of 3 years (initial term) with an option to renew for a further 3 years, during the initial term there is either an annual increase by a fixed percentage or by CPI, and then when the initial lease term expires there is a market review;
Outgoings – whether you will be liable for outgoings, and if so, what type of outgoings and in what percentage. We see varied clauses in relation to outgoings, sometimes the lessee/tenant is not required to pay any outgoings (perhaps the rent is a little higher than normal but there is no obligation to pay outgoings); and on the other end of the spectrum where the lessee/tenant is liable for all outgoings including land tax;
Security deposit/bank guarantee – usually you are required to provide a security deposit or bank guarantee to the lessor/landlord from a financial institution approved by the lessor/landlord;
Guarantee – often if the lessee/tenant is a company, the lessor/landlord will require a personal guarantee by the director(s) of the company, guaranteeing the obligations of the lessee company to meet its obligations under the lease including the requirement to pay rent;
Make good/reinstatement – the provision in the heads of agreement or lease may not actually be called ‘make good’, but this is a term used to refer to clauses which require the lessee/tenant to restore or reinstate the leased premises to the state of the premises as at the time the lessee/tenant took possession. Depending on the terms and scope of the make good clause, this could be a significant and costly process. For example, if you fit out the premises, you may be required to completely strip out the premises and restore it to the state of the premises when you first took up occupation.
Legal costs – sometimes leases require that the lessee/tenant pay the lessor/landlord’s legal costs in relation to the negotiation and preparation of the lease. If acting for the lessee/tenant our position always is for both parties to pay their own costs in relation to the lease, but if this is not possible (for example, the lessee has agreed to this in the heads of agreement or the lessor simply will not budge), then the legal costs for which the lessee is liable should be capped.
Retail Leases – if your business falls under the description of a retail shop business under the Retail Leases Act 1994 (NSW), and none of the exceptions under that Act apply, both parties will be required to comply with various provisions of the Retail Leases Act 1994, in particular in relation to disclosure.
If you need a lease prepared or reviewed or are thinking of re-negotiating the terms of a current lease, contact Rockliff Snelgrove Lawyers to guide you through the process!