Landlords' offers of rent reductions,
rent-free periods, or fit-out contributions are handy sweeteners for SMEs
looking to sign commercial leases. But these may be waning, with SMEs looking to lease 300sqm the
lease most in demand across many sectors.
Ensure your business follows these due
diligence tips before signing a lease in this fluid environment.
Permitted use of the premises
A major hiccup for those about to sign a
commercial lease is zoning. Check local council regulations permit your
intended use of the premises. If the site has been vacant for a year, some
councils may require you to submit a development application even if you're
using the premises the same way as the previous tenant.
Be sure the lease is conditional upon
council approval for your intended use. If the council rejects your
application, you won't have to go ahead with the lease.
Personal or director's guarantee
Landlords may ask you for a personal
(security) or director's guarantee before signing the lease. A director's
guarantee may be requested if your limited liability company is named as the
tenant. It means if you have issues paying rent, your assets are at risk.
Seek financial advice before offering
guarantees, which can amount to three to 12 months' rent.
Alternatives include agreeing to a
different amount, so it reduces your liability. You could also negotiate with
the landlord to offer a higher security deposit or bank guarantee.
Terms of the lease
Check your state or territory retail
leasing laws because they may also apply to commercial property. This Lawpath article
details the differences between commercial and retail leases.
Some jurisdictions restrict the minimum
term of the lease, but typically a commercial lease lasts for at least a year.
You may be up for some negotiating if you want a three-year term, though the
landlord may prefer five-to-10 years. You are unlikely to be able to end a
leasing contract early without a stiff financial penalty.
The lease should also specify rent
reviews, which could factor in:
- The consumer
price index (CPI)
- A fixed
percentage increase in the rent at particular points in the lease term
- A set percentage
of the lessee's business profit
- Market rent.
With CPI hitting 5.1% in the March quarter,
it makes sense to check your budget forecasts to ensure you can meet
anticipated rent rises over your lease term. The net and gross rent differ, as
the latter will include outgoings.
The lease may also limit the type and
extent of business signage you can install and how you maintain it.
Ensure you have options to renew when the
initial term finishes so you can choose to keep trading. Peruse the agreement
for the termination clause and if there is one, ask for its removal. Otherwise,
it creates uncertainty for your lease and, therefore, your business.
Lessee and lessor responsibilities
Commercial landlords may seek to recover
costs and outgoings from you, so the lease agreement should set out those
assigned to you.
Ideally, the lease will be explicit about
the outgoings the tenant will cover, including:
- Utility bills,
such as water, gas, electricity and internet.
- Strata and
property levies
- Property
maintenance, such as landscaping, and
- Property and
real estate taxes, including stamp duty, etc.
Verify who will maintain equipment and
fittings under the lease, or a major breakdown could thwart your business while
you work out who's responsible for repairs. Also, find out the base date the landlord will use
for calculating your outgoings.
Check the lease allows you to sub-lease
part or all of the premises, if you're looking to do so. Also, how much money
will be distributed back to the landlord. You should notify and seek permission
from your landlord of any intention to sublet.
Once the lease ends, the lease usually
requires the landlord to restore the premises to their original condition.
Why insurance is important under a commercial
lease
Landlords look to you to protect their
interests and investments. The lease will also stipulate tenants have insurance
with the landlord listed as an interested party on the policy.
Commercial leases often require tenants
take out cover such as:
- Public liability
(usually between $10M and $20M)
- Workers'
compensation
- General property
and theft damage – often called an 'all risks policy'
- Plate glass
window to ensure the premises stay secure.
The landlord cannot force you to take out
insurance with their preferred insurer because this is prohibited as 'exclusive
dealing' under the Competitionand Consumer Act 2010 (Clth).
That's where we come in. We can research
the best-fit policy package to meet your unique business needs. Our experience
in supporting commercial tenants means we can guide you to improve the risk
profile of your business. Better risk management and bundling policies together
in a package can help earn discounts such as reduced premiums.
Useful links:
NSW Government's small business info kit: before signing acommercial or retail lease
Common commercial real estate terminology: A handy guide fortenants
This content is created and provided by Finnigan Investments
(Australia) Pty Ltd trading as OneAffiniti on behalf of Austral Risk
Services, and is for commercial purposes. Any financial product advice in this
content is provided by Austral Risk Services AFSL No. 244369. This material is
general in nature and has been prepared without taking into account your
objectives, financial situation or needs. Accordingly, before acting on it, you
should consider its appropriateness to your circumstances.