Optimising Your Commercial Lease

Hopefully you’ve first read our article, Commercial Leases 101 so you have a good grasp of the basics of entering into a commercial lease. Now it’s time to focus on some of the details and importantly the areas where others make costly errors when signing up to a commercial lease. By avoiding these pitfalls you can actually optimise your lease and ensure you take full advantage of the opportunities available.

Allowing Enough Time

Whether you’re relocating your business or setting up a new operation, the entire process can take quite a long time and many people get caught out by not allowing sufficient time for the whole process. It can take 6-18 months or longer, to find the right premises, negotiate the lease, organise your fit out and move in and be operational. The longer you give yourself for the process, the less likely you will be caught in a panic and be forced into signing up for something that may be less than ideal.

We suggest that if you are considering re-locating your business first come and see us and bring your current lease and we will review the details and explain what is involved in either taking up options on your current premises and/or the costs of not renewing, making good etc, giving proper notice so you exit your existing lease without mishap.

The Right Advisors

Ensure you select the right team to assist, advise and guide you through the entire business relocation process. Commercial leases are binding agreements with a lot of fine detail which needs legal attention. If you’re looking at a number of premises, we can review the various options and of course assist in drawing up the final lease and registering the lease if required.

Unfortunately, many people who are new to leasing premises will, on the say so of the real estate agent (who remember is acting for the landlord) sign an Agreement to Lease not understanding that it of itself may be a legally binding document

Do not let yourself be pushed or rushed into signing an Agreement to Lease by the Agent.  We can review and advice you on an Agreement to Lease, normally within 24 hours of receiving the document.

Check the Details

As mentioned in the earlier article, before signing the actual Lease, you may be asked to sign an Agreement to Lease or Heads of Agreement. This may be a binding document and you need to ensure the details are correct:

1. Correct name of the leasing entity: Check with your accountant to ensure that you have the correct entity named in the agreement. That is, the name of a company,  trustee , joint names, sole name, etc. We see cases where a client has signed an Agreement to Lease under his own name only to be subsequently told by his accountant that for taxation purposes it needs to be registered in a different entity.  That can create problems which can be avoided by checking upfront.
2. Rent Details: Is the amount of rent inclusive or exclusive of GST? Commercial rents can run into a considerable business expense and overlooking this aspect can seriously affect your budgeting.
3. Type of Business Specified: Does the lease clearly specify the type of business you will be engaging in both initially and into the future? You need to be both specific and in some cases, wide ranging in the description of the type of business, services and/or goods you wish to sell from your premises. Otherwise you may find yourself excluded from being able to sell or offer certain services from your premises. If you have plans to expand, make sure those plans are reflected in the lease.

Know Your Business Plan

Setting up business premises, no matter how small your business, can be a costly experience both in the initial set-up and fitout and also in the downtime. So you need to a clear vision for your business today and for the entire duration of the lease you are entering. If you plan to grow and expand, do the premises have space to cater for your growing plans? Ensure they are growing plans and not growing pains by checking that if you plan to put on more staff you have office space for them, if you plan to expand your service offerings or change the type of business, ensure the premises permit such business activities.

Budget Forecasting – Outgoings

There is a lot of ‘fine print’ in commercial leases and many people do not understand that when premises are advertised for rent they can be spoken about as either being inclusive or exclusive of outgoings or as sometimes stated “gross” or “net”. If it is gross it is inclusive of the outgoings and is the total amount or net being that it is exclusive of outgoings and outgoings have to be added on.

Premises which may look quite cheap because of a low base rental figure can in some cases end up being exorbitantly high when outgoings are factored into the rental price.

If comparing premises, make sure you compare the outgoings and ensure you allow for these in your budgeting.

Exclusivity

If you want to be the only business of your kind operating from that shopping centre, then your wishes need to be clearly stated in the lease and definitely discussed in initial conversations with the landlord to avoid last minute issues. The last thing you want is to open your business only to find in six months’ time that the landlord has let another shop in the same centre selling the same goods as you.  Unless you have an exclusivity clause, the landlord has the right to do so and there is nothing you can do about it.

Lease Terms Suit Your Business Plan

We’ve stressed the importance of knowing where your business will go into the future and the terms of the Lease are critical. What are the terms of the Lease, do they allow for any options to renew the Lease?  Commonly, leases can be expressed to be, for example 3 x 3 (a three year term with an option for three years), 3 x 3 x 3 (a three year term with two option periods of three years each), 5 plus 5 (a five year term with a five year option) etc.

Before signing, make sure these terms are in line with your business objectives.

Options

If the Lease provides for you to have an option to renew the Lease after the end of the term, then consider closely the manner and timing which the tenant must give to the landlord in the event that they wish to renew the lease for a further term.  We have had situations where clients have failed to strictly comply with the requirements to exercise their option and the landlord has seized on that opportunity to refuse them the automatic right to continue leasing the premises.

Options can be an asset to your business if you plan to sell the business within the leasing period. Selling a successful business located in premises with a long-term lease/options already negotiated, can add value at the time of sale.

Make Good Conditions

One condition which often catches people by surprise, unfortunately when it’s too late, is the make good clause. This refers to you, the tenant, having to return the premises to the condition it was prior to occupation. This can be an expensive process so ensure you have those details clearly specified in the lease and take a lot of photos at the time of agreeing to the lease, so the condition you took the premises is clearly documented.

General Maintenance

While you are largely responsible for maintaining your own premises, the landlord will be responsible for maintenance of the common areas, exterior and other areas and some services. Ensure that this service and the level of this service is written into the lease.

For example, maintaining the exterior of a building in a clean and neat appearance may affect the entire image of your business to customers. Same goes for lift foyers, communal toilets and other spaces. Check out the reputation of the landlord to ensure they are up to your standards and prompt in making repairs etc.

Special Conditions

Are there any special condition which you want included?  For example, you may wish to include a due diligence clause whereby you have 7 days from signing the Agreement to Lease to carry out your due diligence. This allows you to ensure that you are satisfied with the location of the premises, rent represents good market value etc.

If you are considering moving business premises or currently considering a commercial lease, please contact us at business@mclaughlinlawyers.com.au or phone us on 07 3808 7777 for a confidential discussion regarding how we can assist you.