Commercial Leases 101

commercial leases

The what, who, how, when, where of renting business premises

Whether you’re starting a new business, looking to upscale or downscale or just needing to move, when you rent premises from which to conduct your business, you’ll be entering into a commercial lease. Commercial leases are significantly different from residential leases so if you haven’t entered into a commercial lease before or you’ve made mistakes when entering into one previously – please read on with this initial overview of the basics. Then follow up with our story on avoiding the pitfalls and optimising your commercial lease to your benefit.

There are several quite complex issues that you need to pay close attention to and we strongly advise you consult with us at McLaughlin & Associates to methodically go through every detail before you sign.

Commercial Lease – The What

The term “Commercial Lease” basically covers all non-residential leasing arrangements between a landlord and tenant (more commonly referred to as Lessor and Lessee), including properties for retail, non-retail (offices) and industrial purposes.

The golden rule as with most areas of business is not to sign anything without first having your lawyer read over it and this applies equally so when entering into lease arrangements for premises.

Heads of Agreement – The Who

Commercial Real Estate agents usually handle commercial properties to rent on behalf of the building owner, but very often the building owner themselves will be your point of contact. This can be advantageous as you have the direct one-to-one opportunity to negotiate the lease conditions. Yes, negotiate – that’s coming up later!

Before you sign the actual Lease you will most likely be asked to sign an Agreement to Lease.  This document can take various forms but basically it acts like a Heads of Agreement in that it records the major points to be included in the Lease such as:

  • the name of the lessee,
  • the amount of rent to be paid,
  • whether outgoings are to be paid in addition to the rent,
  • the term of the Lease,
  • the use of the premises etc.

This document may be legally binding so don’t sign until you have consulted with your lawyer.

Another ‘who’ in the commercial lease scenario are tenant advisory services consultants, sometimes referred to as ‘tenant advocates.’ These are specialist people/businesses, offering services to business looking for commercial premises. Their services may include sourcing premises for you to inspect, assisting you with negotiating with the building owner and many other aspects of the process. Such services can be extremely helpful but note, they do not replace and are not a substitute for professional legal services. If you do engage a tenant advisory service to assist you, insist that you will have us, your lawyers, review every document before you sign.

Terms of Lease – The When

When entering into a commercial lease, you need to have a clear focus for the future of your business. You will be signing up for premises over a timeframe of a minimum of say 3 years and possibly taking options to extend. So make sure the premises are suited to where you see your business developing and growing or downscaling over that period.

In the state of Queensland, where a Commercial Lease is for a term of more than 3 years, then it must be registered on the title of the property. This process protects the interests of the tenant if the building owner sells the leased premises during the terms of the lease. The ‘3 Years’ can be either 3 year term or say a 2 year term with a two year option period.

If this registration process is overlooked and the building owner sells the premises, you risk the scenario of the new owner not honouring the current terms of your lease. If not the general terms then at least the option to renew.

While registration of a Commercial Lease does incur costs, the costs of not registering your lease could be far greater to your business if the worst case scenario plays out.

Options

Options are conditions written into the lease which give you the first option to renew the lease after the initial term is completed. It is not a commitment that you must renew, but it gives you the security that if you do want to remain in those premises you can and can grow and develop your business accordingly. It also saves the time and money involved in re-negotiating a lease.

If options are included, the lease will provide the manner and timing which the tenant must give to the landlord in the event that they wish to renew the lease for a further term.  We have had situations where clients have failed to strictly comply with the requirements to exercise their option and the landlord has seized on that opportunity to refuse them the automatic right to continue leasing the premises.

Permitted Use – The Where 

Before committing to a commercial lease, you need to ensure that the premises are zoned for your type of business. Both now and in the future. For example, an owner of a café may start out only doing takeaways but then plans or decides to extend their services to dining in or maybe even becoming licensed.  If the future plans are not stated in the Lease, you may be prevented from doing those activities in the future. You may need to check with your local council on the zoning for the area and most importantly, any plans for re-zoning in the future.

You should also look closely at the ‘use of common areas’ clauses in the lease.

Some businesses eg, cafes, snack bars, restaurants not only use the premises but also take advantage of alfresco dining outside of their shop on pathways, thoroughfares etc.  If so, then you must ensure that your Lease is reflective of this fact and you do not lose your right to use this space at the whim of the landlord.  We have had clients that this has happened to and it had devastating effects on their business. If signing up to premises in an office building or other complex, check what usage you will be entitled to in regard to common areas such as reception, foyers, car parks, storage and other facilities.

Relocation of Premises – The What The?? 

In particular with retail premises within shopping centres, you may not have as much control of your circumstances as you would think. Many leases include the right of the landlord to move tenants around the shopping centre, ie to another shop location, at their discretion.

This is one of the first things that we look for in retail leases, does the landlord have the option to move our client from their existing site to elsewhere in the centre.

As a business owner, location may be very important and indeed may have been a crucial factor in you deciding to lease these particular premises.  The last thing you want is to find that in 18 months’ time the landlord gives notice that he is going to relocate you elsewhere in the centre.

Negotiations and Incentives – The How

Unlike most residential leases which come with a ‘take it or leave it’ set rental price and usually very little by way of discounts, extras and incentives, the world of commercial leasing is a completely different scenario.

The rent is only one aspect of the actual lease, there are a multitude of other factors to be considered including building owner contributed cash or rent waiver toward your fitout costs; rent waiver during your moving in period; the ‘make good’ conditions imposed when you move out in regard to returning the premises to the original conditions, contribution to cover outgoings and even more incentives.

And all this is negotiable! So you really need to know how you see your business into the future, have a clear idea of your financial capacity and be ‘all over’ the total costs of this move. Relocating or setting up business premises can be a costly experience with fit-outs, downtime etc and all this needs to be factored into the actual lease.

Terms of any and all incentives must be recorded in writing detailing exactly the terms of such incentives.  For example, quite often a landlord will provide a rent-free period of say six months, however, in the event that the tenant does not fulfil its obligations under the lease then the landlord can demand payment for those rent-free months.

Too often we see clients who have placed too little importance on the lease.  They are so busy organising the relocation of their business or the fit-out of the premises that they simply sign whatever the landlord has put in front of them only to find midway through the term of their lease that they are not protected or things are not as they thought they were.  This can all be avoided by taking the time at the outset to consult with your lawyer and get it right.

Please read our next article on Optimising Your Commercial Lease, which covers how you can avoid many of the common mistakes made by others!

If you are considering moving business premises or currently considering a commercial lease, please contact John McLaughlin, McLaughlin & Associates Lawyers at: 

Email: john@mclaughlinlawyers.com.au

Phone: (07) 3808 7777 for a confidential discussion regarding how we can assist you.