When you are setting up a bricks and mortar business, one of the most important documents you will sign is your lease. It’s so exciting to find business premises that have LOCATION LOCATION LOCATION. You’ve probably spent months trying to find the right location for your business. You want to move in right away and start fitting out the premises. As tempting as it might be to immediately sign your lease, there are some questions to ask before you put pen to paper and sign a retail or commercial lease.
What type of lease – Commercial lease or a Retail lease?
It’s important to know what type of lease applies because the regulatory framework is different for each. Parties under a commercial lease (usually for offices, warehouses and industrial sites) can contract out of the relevant property and conveyancing legislation and the extent of the tenant’s liability can be negotiated. On the other hand, a retail lease (for shops or businesses located in a shopping centre) assumes that the tenant has unequal bargaining power with the landlord and provides protective measures to uphold the tenant’s rights. There are also additional obligations on the landlord.
What important provisions should you look out for?
Whilst every lease transaction will vary, the more significant terms relate to:
- The premises covered by the lease, rights of access, parking and use of additional amenities;
- The term of the lease;
- The existence of any option to renew, including its terms;
- Rent and rent review;
- Entitlement to affix and remove fixtures;
- Entitlement to assign or sublet and the conditions of that entitlement;
- Obligations for doing work or expenditure of money including paying rates, electricity and other outgoings and to repair and maintain the premises and equipment supplied by the lessor;
- Restrictions on use and ability to change use;
- Provisions entitling the lessor to terminate the lease for any reason;
- Demolition and relocation clauses;
- Bank Guarantees and Personal Guarantees (by directors); and
- Make good provisions (many tenants are shocked when they discover how much it will cost to hand back the premises at the end of a lease).
Have you been given a disclosure statement?
At least seven days before a retail lease is entered into, the tenant must be given a disclosure statement which provides a summary of financial obligations. It covers rent, rent review, outgoings, other costs associated with the lease and other important provisions such as the likelihood of relocation and/or demolition of the premises. If the landlord doesn’t provide a disclosure statement as required, the tenant has the right to terminate the lease, even after it is entered into.
The disclosure statement will also set out your obligations as tenant, such as any fitout works to be carried out, what type of insurance you must take out, whether you are required to redecorate the premises and if so, how often.
A disclosure statement is not required for a commercial lease.
Who pays the lease preparation fees?
Under the Retail Leases Act, a retail lease tenant doesn’t have to pay the landlord’s lease preparation costs or mortgagee consent fees. However, if the tenant asks for changes to the lease after the tenant’s disclosure statement has been returned to the landlord, the tenant may be required to pay for the changes.
The tenant is required to pay for the registration of the lease, which should be done for leases with a period of more than three years (including any option to renew period) to protect the interests of both the tenant and landlord.
For commercial leases, the parties can negotiate who is responsible for the payment of legal costs and fees.
Spend a little to save a lot
It can be very costly to set up a new business or fit out retail premises, but the money that you save by not having your lease reviewed might end up costing you so much more if you don’t have a thorough understanding of your rights and obligations, as well as those of your landlord. As well as providing advice on the proposed lease, your lawyer can negotiate changes on your behalf if required. Your lawyer will review the lease documentation provided by the landlord to ascertain if the documents record the leasing terms agreed between the tenant and the landlord. It’s important you keep a record of all the agreed terms and promises made by the landlord (or their agent) and provide this information to your lawyer.
There are significant differences between retail and non-retail leases and both landlords and tenants should understand what is permitted under the retail laws regarding their lease terms and the consequences of non-compliance with mandatory obligations. The terms of commercial leases are unregulated and it is equally important to have the terms reviewed to ensure that they don’t place unfair obligations on the tenant or heavily favour the landlord.
Your lawyer will also be able to explain to you the consequences of signing personal guarantees to support leasing obligations.
SRM Lawyers are located in Lane Cove. Please contact us if you are thinking about leasing a property.
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This is advice of a general nature, this article does not constitute legal advice and is not meant to be complete or exhaustive.
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