Leasing Property

Your profitability is sure to suffer if you are locked into paying too much rent throughout the term of your lease. Check it before you sign the lease. You can do this in various ways. You can get informal advice from commercial real estate agents active in the area. You can engage a certified practising valuer to determine the current market rent. You can research online to see how much rent is being asked per square metre per annum for comparable properties in the area. You also need to know what incentives are being given to tenants in the area, such as rent-free periods, rebates, contributions to fit out costs, and the like.

The profitability of your business could be affected if you find out that the premises does not include parts that you thought you could use. For example you may have the impression that storerooms in the building will be yours to use, but if that is not clearly stated in the lease then you won’t be able to use them. You have to be very clear about what car parking you have, we may find that some spaces you thought you could use are really part of other premises within the building.

You may assume that certain outdoor areas make up part of your premises, and then later find out that they are not included and you can’t use them. You may also find out that you are liable for the maintenance and repair of parts of the building will be at your cost because they are unexpectedly part of your premises. For example, you may learn that you are responsible for cleaning and maintaining stairways or gardens that you thought were part of the common property. Before entering into a lease you should talk to your solicitor about exactly where your new premises begin and end.

If you are inspecting potential new premises accompanied by the landlord or the letting agent, then you should make a note of everything they promise to do for you if you enter into a lease. They may promise to repaint, refurbish a bathroom, install a skylight, leave shelving for you to use, install or service air-conditioning, install new carpet, provide incentives such as rent-free period, delay provision of the security deposit, waive the requirement for directors’ guarantees, service the roller shutter, etc. make a list of these things and give it to your solicitor and don’t sign the lease until you see them in black-and-white in the lease document.

Most commercial leases specify that the tenant must pay “outgoings” in addition to the rent. However, some leases (particularly leases of retail premises) specify that the rent is inclusive of outgoings, and therefore the landlord must pay them. Probably all leases specify that the tenant must pay “services”.

Generally, outgoings are the expenses that a landlord must pay even if a premises is empty. For example, council rates, water rates, land tax, building and public liability insurance, maintenance and repairs, and the like. On the other hand, services are expenses that are payable only if there is a tenant in the premises. For example, telephone, gas, electricity, water usage, grease trap servicing, etc. Your lease should be very clear on which expenses will be yours to pay. You can only do cash flow forecasting for your business if you are clear on these things.

If your business is going well and in your lease you have an option to renew for a further term then you need to understand how to give a valid notice requiring the new lease. You need to make diary entries to make sure you don’t overlook the window of opportunity for serving the notice.

If you don’t exercise the option to renew properly, and the landlord wants the premises vacant, then unless you can find suitable premises to move to you could completely lose your business.

If your business fails for some reason then the landlord will most likely have some security for unpaid rent. This may be in the form of a cash security deposit or a bank guarantee. If you fail to pay rent or otherwise breach the lease then the landlord can withdraw part of the cash security deposit or can call on the bank guarantee by presenting it at the bank that issued it.

The landlord might also have security in the form of personal guarantees (usually from directors of the tenant company). If a husband and wife, and maybe other family members, are directors of the company operating the business then the lease may make them all liable to the landlord in the event of a breach. If a financial disaster hit your business then they could potentially all be bankrupted and lose their assets. When entering into a new lease you need to talk your solicitor about whether there are alternative approaches to the question of Security which do not expose too many people to liability. You might have to provide a bigger bond.

If your landlord sees potential for redevelopment of the building containing your premises then they may have demolition or relocation clauses in the lease. Such clauses generally state that if the landlord has a genuine proposal for redevelopment the landlord can give you six months’ notice to vacate.

There is normally no compensation payable to the tenant in these circumstances. If you can’t find suitable new premises within the time required to vacate, then you could completely lose your business. Get your solicitor to check the lease for these clauses before you sign.

Most leases include a clause that states that there will be a “rent review” on each anniversary of the commencing date. The lease may say that the rent is to be increased by CPI, or it may be increased by a fixed percentage or to a fixed dollar amount, or there may have to be a review to “current market rent” (which may require that the parties engage a certified practising valuer).

The cash flow forecasting will be greatly affected by how increases to rent are dealt with. Make sure you understand this before you sign your lease. Work out whether it will be fair to you or not. Talk to your solicitor about whether your lease includes a “ratchet clause” and understand what that means.

Before you sign a new lease for new a premises you should make investigations to find out whether the landlord promptly attends to problems in the building. Some tenants go right through the term of their lease without ever being happy about the standard of air-conditioning in their premises. Some tenants find that there is non-stop failure of the lifts and the landlord doesn’t seem to care.

Some commercial buildings have gardens that have no maintenance that make the place look very shabby, and this will reflect on your business. Your lease should contain consequences for the landlord if they fail to maintain the building to a specified standard. You can often find out about these things by talking to other tenants within the building.

Your lease will contain a clause specifying what you are allowed to do in the premises, but that use may or may not be allowed by the local council. When you wish to take new premises you should talk to your solicitor about whether you should be obtaining council consent to the use before you sign, or whether the lease grants you a right to walk away from the lease if you cannot get council consent within a specified period. Often landlords will give a new tenant a rent free period which should give the tenant enough time to obtain consent to use, and start trading. Your business will not make any profit if it cannot trade legally.

If you are about to sign a new lease then you should check the permitted use specified in the document and then think about whether the nature of your business is likely to change over time. For example a tenant operating a successful commercial bakery may think that if everything goes well they will open a coffee shop or patisserie on the premises. However that would be introducing a retail use which may not be permitted under the lease.

You may enter into a lease that permits the premises to be used as a warehouse, but as your business develops you may wish to carry out some manufacturing. Think ahead before you sign your lease if this is likely to be an issue.

You may see that your business is going to expand in the future and therefore in order to avoid an expensive and risky move you may take a lease for more space then you need immediately with the intention of subletting the excess space until you need it. If this is your plan then you should make sure that you or lease includes a clause allowing it, because you cannot sublet any part of your premises without the landlord’s consent.

It is only reasonable that your landlord can terminate your lease and lock you out and sue you for losses if you breach the lease. However, sometimes tenants breach their lease with no fault on their part. You should have your solicitor check that your landlord has to give reasonable notice before your lease is terminated on grounds of breach because it is only fair that you have warning so that you have the opportunity to fix the problem.

Leases invariably include clauses that make the tenant responsible for checking that services (such as telephone, electricity, Internet, etc) are available to the premises. There have been many cases where tenants have signed leases only to find that telephones won’t be available until weeks after the tenant intends to commence operating. There will not be anything in the lease to help you, so you need to be very clear with your providers as to whether they will be able to connect you up in time for your grand opening.

Your lease needs to be very clear on what your rights are to use car spaces for your employees and your customers. You also need to know whether the landlord is prepared to back you if you find that other people parking your car spaces without your permission. You need to check that there are clauses that will make the landlord liable if you are denied your parking rights, and it is also preferable if you have the right to install some form of physical barrier, such as chains or posts or gates, to prevent use of your valuable car spaces by others.

Your lease will contain clauses specifying what you have to do about the premises at the end of the lease. There is likely to be a clause that states that you have to restore it to the configurations that it was in at the start of the lease. There is probably a redecoration clause that requires repainting and installation of new carpet at your cost. There may be a clause requiring that you restore the premises back to bare concrete, even though you’re fit out may be in perfect condition and probably very suitable for the next tenant. These are all very expensive issues.

You are likely to be liable to continue to pay rent until you have complied with these clauses, even though you have moved out and handed back the keys. In order that your landlord cannot claim that you rectify faults that were in the premises when you moved in, you might consider obtaining a “condition report” which will be a description (including photographs) of all of the defects that were in your premises when you first signed up.