Home Business & Company Key Considerations for Tenants when Negotiating a Retail or Commercial Lease

Key Considerations for Tenants when Negotiating a Retail or Commercial Lease

Having the right lease in place can make a huge difference to the value and security of tenure for your business.

In this article we have compiled a list of 10 key considerations when negotiating your lease.

1. Do not sign a lease until it has been legally reviewed

If you are presented with a lease for signature, then have it properly reviewed before you sign it. Leases are (most often) long term obligations and are not to be entered into lightly or without legal advice. And this applies to Heads of Agreement as well.

A heads of agreement is usually a simplified document setting out an agreement in principle to lease premises and while they are often stated as being “non-binding” until the lease is signed, look closely to see if you are being asked to pay a deposit and if the landlord can hold any part of the deposit back if the lease is not signed.

2. Rent

What rent you are being asked to pay? Is it market value? Have you done your research on rents in the area and/or considered getting a market appraisal from an experienced independent valuer?

If you are paying rent on a per/m2 basis make sure that the rentable area is recorded in the lease. And have that area checked (preferably by a surveyor). If common areas form part of the premises they should be excluded from the rentable area. And consider the shape and layout of the premises when determining the rate per/m2.

Secondly, how is the rent to be reviewed? Every year by CPI? A fixed rate? To market value on renewal? Can you get rent increases capped? All these factors are important when it comes to understanding the rent you will have to pay during the entire term of the lease. Make sure you understand the different types of rent review and the practical impact they will have on the rent you pay.

3. Rent Free Periods

A common inducement offered by a landlord to get a tenant to enter into a lease is a rent free period. Most rent free periods are tied to a tenant’s need to fit out the premises before they open for trade. And while they are common, not all landlord’s offer them freely so as a tenant ask for one and make sure it will cover your full fit out term (or better yet for a period of time when you open for trade).

Other incentives may also be offered by a landlord (contributions to fit out as an example) so do your research and see what is being offered in the area.

4. Outgoings & Cost of Repairs

Most tenants understand that they have to pay for their own business outgoings (phone and electricity for example) however under a commercial lease a tenant is also usually required to pay a landlord’s outgoings as well.

These outgoings can be extensive: land tax, landlord insurance, council rates, water rates, management fees and fire safety to name the most common. It is therefore important that you understand what these outgoings are likely to cost you. Ask the landlord for a list of outgoings together with an estimate or budget of outgoings. If you want certainty, consider asking for a “gross lease” which is an all-inclusive rent and outgoings lease.

You will also need to meet the cost of repairs to maintain the premises during the term of your lease (excluding structural repairs and capital items which should be a landlord’s responsibility). From a practical perspective pay attention to maintenance obligations that impose a cost on you as tenant, for example servicing of air conditioning units. AC is often one of the biggest points of conflict under a lease. Are you being asked to service the AC and pay for this? How often? Are you required to have a service contract in place? All things to look out for and be aware of.

5. Securities

A landlord will (almost always) ask a tenant for security for the tenant’s obligations under the lease.

The three most common types of security asked of a tenant are:

a bank guarantee,
a cash security deposit, or
a personal guarantee.

A bank guarantee is usually for an amount between 2 and 6 months’ rent. If you are required to provide one, make sure it has a maximum term (usually 2 to 6 months after the expiry of the lease) and it is dated. Do your research and understand the cost of getting a bank guarantee from your bank, what paperwork you must sign with your bank and timeframes to implement.

A security deposit is a cash deposit and will again usually be for an amount between 2 and 6 months’ rent. If you are paying a security deposit, have it lodged with the NSW Government’s Retail Bond Scheme.

A personal guarantee will often be asked for if the tenant is a company. And landlords often ask for a security deposit (or bank guarantee) and a personal guarantee together. Be smart and try and limit the amount and types of security you have to give.

6. Term

The term of the lease refers to how long the lease will run for.

A 5×5 lease means an initial five year term with an option to renew for five years. A 3x3x3 is three years with two options to renew for three years.

There is no standard lease term so make sure you match it to your business needs. If you are starting a business, you might want a shorter initial term with longer options. If you have a business that is difficult to relocate you might want to secure your business with a long tenure.

7. Use

The permitted use under the lease needs to match that of your business.

You also don’t want the permitted use to be too narrow in case you want to move on in the future and transfer the lease (assign it) to someone else.

If you are leasing premises in a shopping centre or other complex under which your landlord is the sole owner, consider asking for exclusive use, so that the landlord cannot rent the other premises to a potential competitor.

And just because the landlord agrees to your use of the premises does not mean that your use is permitted under local council rules. It is a tenant’s obligation to check with council and confirm this. As a tenant make sure that your business use complies with council zoning regulations and that you understand what council rules apply to your business use from the premises.

8. Make Good Obligations & Redecoration Clauses

Make good obligations apply at the end of a lease but it is important that a tenant understands these obligations before they enter into the lease when the make good terms are being negotiated and agreed. For more on make good obligations read our article here: What is a Tenant’s Obligation to Make Good Under a Lease

Sometimes confused with make good obligations are redecoration clauses. These require a tenant redecorate the premises (such as repaint the premises) at certain times during the lease. As a tenant you generally don’t want to do this more than once during a lease term, and if you agree to do so then preferably at the expiry of the lease in conjunction with your make good obligations.

9. Legal Costs

It has become accepted industry practice that a tenant pays a landlord’s legal costs for the preparation and registration of a commercial lease. Important: this is industry practice, it is not a law. Smart tenants ask that they only pay their own legal costs. If you cannot negotiate this, ask for an estimate of expected landlord legal costs upfront and better yet negotiate a cap on these costs so that you know the maximum amount you will have to pay.

For retail leases, the Retail Leases Act prohibits a landlord from seeking to recover any legal costs in connection with the preparation or renewal of a lease from a tenant (they can only ask for registration fees). Be aware however that just because the law prohibits this, does not always stop a landlord from asking for them.

10. Getting the keys

And lastly, tenants often think that as soon as they have negotiated and signed the lease they will get access to the premises. Most landlords however will require that in addition to the lease being signed a tenant must also provide satisfactory evidence that:

the required security (bank guarantee for example) is in place, and
the insurances required under the lease (most often being public liability, tenant contents and plate glass insurance) are in place.

Do not forget to attend to these two key matters as they are often the source of delay in getting keys and access to your new premises.

If you would like legal advice on any lease matter, please contact our commercial law team here at Roberts Crosbie Mortensen. And remember, do this before you sign any lease or heads of agreement.

Commercial Lawyers for Sydney and Newcastle

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The information in this article is not legal advice and is intended to provide commentary and general information only. It should not be relied upon or used as a definitive or complete statement of the relevant law. You should obtain formal legal advice specific to your particular circumstance. Liability limited by a scheme approved under Professional Standards Legislation.