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 Competition and 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.