You may be considering the terms of a commercial lease under a variety of circumstances. For example, you may;
- be opening your new business in new premises;
- have purchased a franchise business including a current lease;
- be taking a transfer of lease from an existing tenant; or
- be expanding your business and moving into a new, additional space.
Tenants under commercial leases must consider many risk issues before signing on the dotted line. It pays to do a little due diligence. The purpose of this short article is to highlight some common risks embedded in many leases.
The first issue is one that is often overlooked. What does the “make good” clause of the Lease say? The term “make good” refers to the tenant’s obligation to restore the premises to a certain condition at the end of the term of the lease. Even a relatively modest make good clause requiring the tenant to simply “repaint the premises and replace the carpet” could involve considerable expense at the end of the lease of a large office space. However, some make good clauses are incredibly detailed and require the tenant to undertake extensive work. Make sure you understand what you will be required to do at the end of the lease before you sign up. Don’t let the fact that the make good obligations may be several years away blind you to their cost.
In longer term leases there are often “redecoration dates” dotted throughout the lease term. Redecoration obligations can be just as costly as make good clauses. Keep an eye out for them.
You should carefully consider what security the landlord requires under the Lease. If a bank guarantee is requested, what will it cost you to provide it and when will it be returned to you? If the rent is increased during the term of the lease, are you required to provide additional security? Does the Lease require you to provide a Director’s guarantee (if the tenant is a company)?
If you are taking over an existing lease, you should find out if the landlord provided the outgoing tenant with any incentives (such as a rental abatement). Will you be entitled to the same incentives?
If you are signing up to a lease covered by the Retail Leases Act, there are additional compliance issues to consider. Have you been provided with an up to date Disclosure Statement? Are there any relocation or demolition plans applicable to the premises or the shopping centre?
Rent, Outgoings and Other Costs
It seems trite to say it but do you understand what you will be required to pay? What is included in the definition of outgoings? If your rent is subject to a “market review” during the term can the rent actually go down?
Who will pay for the costs of preparing the Lease?
Check the insurance clause. Do you actually have all of the policies in place that the Lease requires?
Does the permitted use clause give you sufficient scope to operate your business on the premises?
Assignment and Sub Letting
Although you may not be planning to sublease or transfer the lease at the time of taking on the premises, you need to have the ability to do this during the term to cater for changing circumstances. Your ability to sublease the premises or transfer the lease to a third party should not be unduly restricted.
Term and Option
How long is the lease term? What is the option period? How is the option exercised?
You need to consider what would happen to your business if the landlord asked you to leave the property at the end of the lease term.
It is important to conduct your due diligence on the lease terms before signing up. A failure to do so could result in some very expensive surprises down the track. A lease is a long term contract that involves considerable expense. You should spend some time “getting it right”.
If in doubt, hire a lawyer to conduct a legal review of the lease document and advise you on the risk issues.