Entering into a commercial lease is a significant commitment for any business. Whether you are opening a new shop, moving into an office, establishing a warehouse or expanding your operations, the lease can affect your business finances and flexibility for years to come.
A commercial lease is also more than simply an agreement to pay rent. It can contain detailed obligations about rent increases, outgoings, repairs, insurance, make-good requirements, security and what happens when the lease ends.
Before signing, it is important to understand not only what the lease says, but also what can be negotiated.
Here are five important areas a business should consider negotiating before entering into a commercial lease.
1. Rent, Rent Reviews and Incentives
The starting rent is obviously important, but businesses should look beyond the initial figure.
A lease may provide for annual rent increases through:
- fixed percentage increases;
- CPI adjustments;
- market reviews; or
- a combination of different review mechanisms.
These provisions can have a significant effect on the total cost of occupying the premises over the term of the lease.
What should you consider negotiating?
A business may wish to negotiate:
- the starting rent;
- the frequency of rent reviews;
- the percentage of any fixed annual increase;
- whether increases are capped;
- how CPI increases are calculated;
- when a market review can occur;
- whether a rent-free period or other incentive is available; and
- whether there is a contribution towards fit-out costs.
A landlord may also offer an incentive to secure a tenant, particularly where premises are vacant. This might include a rent-free period, contribution to the fit-out or other financial assistance.
Do not focus only on the headline rent. A lease with a lower starting rent can still become expensive if the review provisions and other charges are substantial.
2. Outgoings and Other Costs
One of the most important questions before signing a commercial lease is:
What will the premises actually cost my business each year?
Depending on the lease, the tenant may be responsible for some or all of the property’s outgoings.
These can potentially include items such as:
- council rates;
- water charges;
- insurance;
- land tax, where permitted;
- strata or building expenses;
- cleaning;
- security;
- air-conditioning maintenance;
- common area expenses; and
- repairs and maintenance.
The lease should make it clear which costs are payable by the tenant and which remain the landlord’s responsibility.
What should you negotiate?
Ask for clarity about:
- exactly which outgoings you will be responsible for;
- whether outgoings are estimated or fixed;
- how increases in outgoings are dealt with;
- whether you can inspect supporting statements or accounts;
- whether there are exclusions from the tenant’s liability; and
- whether the landlord can recover capital expenditure from you.
It is particularly important to understand whether you are agreeing to pay costs that could be difficult to predict when you sign the lease.
A lawyer can review the lease and help identify costs that may not be obvious from the advertised rental figure.
3. Repairs, Maintenance and the Condition of the Premises
Responsibility for repairs and maintenance is a common source of disagreement between landlords and tenants.
A lease may require the tenant to maintain certain parts of the premises, equipment or services. Depending on the wording, the tenant’s obligations can sometimes be broader than a business owner expects.
Before signing, you should understand:
- who is responsible for structural repairs;
- who maintains air-conditioning systems;
- responsibility for plumbing and electrical systems;
- responsibility for fixtures and fittings;
- who maintains external areas;
- responsibility for damage caused by the tenant;
- whether the tenant must replace equipment; and
- what condition the premises must be kept in.
Consider negotiating a condition report
A detailed condition report, photographs and agreed documentation can help establish the condition of the premises at the beginning of the lease.
This can be particularly important when the lease contains significant obligations requiring the tenant to return the premises in a particular condition at the end of the tenancy.
4. The Term, Options and Flexibility to Leave
The length of the lease is another important commercial consideration.
A longer lease may provide stability, but it can also commit the business to substantial rental and other obligations for many years.
Before signing, consider whether the proposed term matches the needs and likely future of the business.
Important points to negotiate include:
- the initial lease term;
- options to renew;
- the length of each option;
- how and when an option must be exercised;
- rent payable during an option period;
- rights to assign or transfer the lease;
- whether the landlord’s consent is required for an assignment;
- whether the lease can be transferred if the business is sold; and
- whether there are circumstances in which the tenant can terminate early.
Options can be particularly valuable because they may give a successful business the ability to remain at the premises beyond the initial term.
However, an option is only useful if the business understands the conditions attached to exercising it and complies with the required notice periods.
5. Make-Good Obligations and What Happens When the Lease Ends
One area that is often overlooked when a business is negotiating a lease is what happens at the end of the lease.
A lease may contain “make-good” provisions requiring the tenant to undertake certain works before leaving the premises.
These obligations may include:
- removing partitions;
- removing signage;
- removing fixtures or equipment;
- repairing damage caused by the tenant;
- reinstating the premises;
- repainting;
- replacing flooring; or
- returning the premises to a specified condition.
These costs can be substantial.
Negotiate the make-good provisions before signing
A business should not wait until the end of the lease to discover what it is expected to do.
Consider negotiating:
- precisely what must be removed;
- what improvements can remain;
- whether reinstatement is required;
- whether the tenant can elect to pay an agreed amount instead;
- the condition in which the premises must be returned; and
- whether the initial condition of the premises is recorded.
If possible, the lease should clearly identify the tenant’s make-good obligations rather than relying on vague or broad wording.
Other Issues That Should Not Be Overlooked
While these five areas are particularly important, a commercial lease can contain many other provisions that may have significant consequences for a business.
These can include:
- security deposits or bank guarantees;
- personal guarantees by directors or business owners;
- permitted use of the premises;
- signage and advertising;
- fit-out requirements;
- insurance obligations;
- trading hours;
- exclusivity provisions;
- relocation or redevelopment rights;
- assignment and subleasing;
- default provisions;
- dispute resolution;
- access by the landlord;
- rights to terminate; and
- what happens if the property is sold or redeveloped.
The right provisions will depend on the type of premises and the nature of the business.
Get Legal Advice Before You Sign
A commercial lease can create financial and legal obligations that continue for years. Once the lease has been signed, there may be limited scope to renegotiate terms that were not properly considered at the beginning.
The best time to obtain legal advice is before you sign the lease, not after a dispute arises.
At Appius Lawyers, we can review commercial leases and help businesses understand their rights, obligations and potential risks before they commit.
If you are negotiating a new commercial lease in Western Australia, contact Appius Lawyers for advice about the terms of your proposed lease.
Disclaimer
The articles published on this website, current at the dates of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action.
Before You Sign a Commercial Lease, Get the Right Legal Advice
A commercial lease can affect your business’s finances, operations and flexibility for years. Negotiating the right terms before signing can help you avoid unexpected costs, restrictive obligations and costly disputes.
At Appius Lawyers, our Perth commercial leasing lawyers can review your proposed lease, identify potential risks and help you negotiate terms that better protect your business interests.
Don’t commit to a commercial lease without understanding your obligations. Contact Appius Lawyers today to arrange a consultation with our Perth commercial leasing team.
Book a consultation with our Perth commercial leasing lawyers before you sign.
📞 Call Appius Lawyers: 08 6181 0600
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