If you don’t already occupy suitable premises for your business, you have a choice to buy or lease. The right option for you can be better determined with the advice of financial and legal professionals. If you decide to lease premises, the information in this guide offers some practical advice to assist with entering into a lease and avoiding common pitfalls.
Investing and negotiating
When you are certain about a suitable location for your business, make sure you know everything about the premises before negotiating with the letting agent. Be aware that the landlord and agent have limited disclosure obligations (eg there is no duty for them to disclose that a property was damaged by natural disasters in the past).
You may be given a letter of offer or intention to sign. Never sign a letter of offer, letter of intention or lease, or pay any deposit without understanding the terms and conditions. A lease can be vital to the profitability of a business. It is usually central to the goodwill, value and future sale of the business. Occupancy costs may be one of the main business overheads. You should speak to your financial advisors about the best way to structure your lease holding and the financial impacts the lease is likely to have on your business. It is always best to obtain legal and financial assistance prior to committing anything to writing.
A lease is a contract that outlines the terms of possessing a property for a specified time at an agreed fee. Different laws and conditions apply depending on the type of business operated at the premises, location of the premises and the length of the tenancy. Failing to understand your rights and the terms of your lease may cause you to breach your lease or lose important rights.
Leases are legally binding so it is important to have your legal advisor thoroughly check the lease before you sign it. Your legal advisor can help you to avoid expensive misunderstandings that could cost you money and your business.
If you are leasing premises to use for retail purposes or if the premises are in a retail shopping centre (where five or more retail shops are located), it is likely that the retail shop leases legislation will apply to the lease. The retail shop lease legislation sets mandatory minimum standards for retail shop leases in Queensland and offers tenants more protection than standard commercial leases. The legislation covers topics such as disclosure obligations, turnover rent, options to extend, outgoings payable and recovery requirements, rent review mechanisms, trading hours, relocation and demolition procedures, dispute resolution and tenant compensation rights.
Short-term leases provide you with flexibility but they also expose you to the risk of not being able to renew your lease or recover the investment in the business. The terms of maintaining the premises are usually the same as for long-term occupation. Consider and discuss options with your legal and financial advisors.
Leasing for longer periods of time will ensure stability but may have a bigger impact on your finances if you are not able to trade. To ensure your rights as a long-term occupier are officially recorded and protected, leases for more than three years require registration of the lease with the Titles Office.
Terms of the lease
The terms of a lease are negotiable so it is important that your legal and financial advisors inspect the lease to be sure the terms are fair. Consider the:
- duration of the lease and right to renew or end the lease before it expires
- formula for calculating and reviewing the rent
- possibility of sub-letting the premises
- restrictions of local town planning laws on types of services or goods that can be traded and trading hours
- landlords’ obligations to maintain the building in which the premises are located
- rights to end the lease or a temporary reduction of the rent and outgoings if the premises are damaged or destroyed
- limitations to your ability to transfer or assign the lease if you decide to sell, and the expense involved (transferring a lease may still leave you with some liability for the rent). Ask your legal advisor to explain these terms
- responsibility to pay for rates and taxes and other outgoings, such as utilities, garbage collection, air conditioning, marketing and repairs and maintenance of the building during the lease
- types of insurance required, who will pay for it and who obtains it
- restrictions on the removal of fixtures and fittings
- obligation on you to redecorate during the terms and reinstate the premises when the lease ends
- consequences of failing to pay rent or other breaches of the lease
- implications of the retail shop leases legislation and whether it applies to your lease
- payment of a security deposit
- terms of any personal guarantee and indemnity (which is commonly required for directors of a corporate tenant)
- impact a lease may have on a franchise agreement.
Process for entering into the lease
Once you have decided to lease certain premises, the usual process for entry into the lease is as follows:
- The lease is sent to the tenant’s legal advisor for approval or amendment.
- For leases covered by the retail shop leases legislation, the landlord will also be required to provide a disclosure statement that outlines the most important terms of the lease and other information about the centre.
- When the terms are agreed and finalised, the tenant (followed by the landlord) will sign the lease.
- The landlord will arrange for its mortgagee to consent to the lease (if required). If the term of the lease is more than three years, the landlord should arrange registration of the lease to protect your ongoing occupancy rights.
What if the premises are damaged?
Unless otherwise agreed, commercial tenants usually have an obligation to maintain the premises in good repair. These obligations will extend to cleaning the premises, repairing or replacing fixtures and fittings and ensuring repair of infrastructure for services and utilities (pipes, wiring), unless the lease assigns this the obligation to the landlord. Your obligations under the lease will apply irrespective of whether any damage is covered by insurance. Usually tenants have the responsibility of returning the premises to the same condition they were in prior to the damage.
Repairing structural damage to a building however, is usually the landlords’ responsibility, depending on the extent of repairs needed and the specific terms of the lease.
Before entering into the lease you should have your insurer carefully review the insurance and indemnity clauses to ensure that they can provide adequate insurance cover to you as required by the lease.
Lease fees and costs
Be aware that in addition to any obligation to pay rent and outgoings, it is common for a landlord to require the tenant to pay lease registration fees, mortgagee consent fees and the cost of any survey plan to be annexed to the lease. In some commercial leases, the landlord will require you to pay its legal fees; this is often negotiable.
Other costs are likely to include the costs of obtaining any authority approvals to operate from the premises, the cost of insurance and the costs of obtaining a bank guarantee or other form of security required by the lease.
Before your initial appointment, ask your solicitor about the costs involved in reviewing and settling your lease. Professional fees may be charged by the hour or agreed in the form of a fixed fee.