In the excitement of deciding to start a new business and wanting to get the doors open as soon as possible, many new business owners rush into a leasing agreement without taking the time to fully understand what they have committed to.
If you’re looking to sign a lease, here are the top five things you should know before putting pen to paper.
Important leasing terms and conditions to check before signing
Your lease will contain terms and conditions specific to the property. When reviewing the lease, look out for the following features and make sure you are happy with what is outlined:
- the length/term of your lease – when does the lease start and when does it end
- option(s) to renew or extend the lease term and for how long, plus how and when the option must be exercised
- early termination of the lease and under what circumstances this can be arranged
- permitted use (consider whether it is broad enough for possible changes in your business) and any restrictions to the product or service you can provide
- exclusivity (no other businesses can sell the same goods/services that you do within the same retail complex)
- ‘make good' at end of lease
- the landlord’s ability to terminate your lease early if they decide to redevelop the property
- the amount of rent you are required to pay
- the basis and frequency of your rent reviews/adjustments (for example, annual CPI review, fixed percentage, market rent review)
- rent free period (for example, during your fit-out)
- outgoings and other occupancy costs – what is payable by you and what is payable by the landlord (including estimated cost for the year)
- how these costs will be claimed from you
- how these costs will be adjusted annually based on the statement to be provided to the tenant (an annual statement showing the actual expenses incurred within a specified period from the end of the financial year, and a budget of expenses on commencement of a financial year)
When have you entered into a lease?
Under the Commercial Tenancy (Retail Shops) Agreement Act 1985, you have entered into a lease when you have:
- taken possession of the premises, or
- started paying rent, or
- the lease has been signed by you (as the tenant) and the landlord
Before carrying out any of these tasks, you should make sure you have fully reviewed the lease and sought legal, commercial and business advice on any areas you don’t understand or require clarification on. It is important to ensure that the lease reflects your negotiated agreement.
Your landlord’s obligations to you
For leases covered by the Act, at least seven days before entering into a lease, the landlord must provide you with:
- a disclosure statement
- the proposed lease
- a tenant guide
- the current year’s itemised expenditure (operating expenses) for the premises
The disclosure statement includes important financial information, such as rent outgoings and other obligations. As the tenant, pay close attention to the details of the disclosure statement and make sure it contains all of the information, benefits or commitments promised by the landlord, or their agent, that may have contributed to your decision to lease this particular business premises.
If not covered by the Act, ask for the disclosure of any material things about the premises and the lease, proposed lease, and itemised expenditure for the year.
State Government requirements that override retail leasing stipulations
There are key requirements covered by the Act that landlords are required to carry out (and override any contradictory conditions in the lease). These include:
- repair and maintain the property (shopping centres)
- provide an audited statement of annual outgoings (in most cases)
- cover their own legal costs in complying with the Act
- send reminder notices to you, as the tenant, to exercise renewals and options
Paying for advice is worth it
Getting professional advice is important!
Signing a lease is a legally binding and serious financial commitment. Take the time to look over the lease closely and ask any questions before you sign on the dotted line.
A lawyer can help you understand, review and negotiate your lease and ensure that all conditions are right in terms of law, legislation and compliance. If you don’t have a lawyer, read our guide: Choosing a lawyer to help you
Please remember, the tips and tools provided here are intended for general information only. When it comes to signing a lease, the best piece of advice we can give you is to take your time and get legal advice to ensure it is right for your business. Some additional sources of information to help you include: