If you are thinking of starting or buying a business you may also be considering leasing business premises. A lease is a legally binding contract and a serious financial commitment.
TIP: You should seek legal, financial and business advice before signing any lease or lease related documents, paying any deposit or other monies, or occupying the business premises.
Matters to consider before leasing business premises
Before starting negotiations regarding leasing business premises, first consider:
- how much you can afford
- planning for your business and its future needs
- government regulations
- location and demographics
- lease type
- time frame
- professional advice
When you sign (known as ‘entering into’) a lease you are committing to paying the landlord rent for the whole term of the agreement, this includes rent increases and other charges and costs covered by the lease.
If you are unable to pay rent on time the landlord could take possession of your business premises and stop you from trading. Meanwhile, you will still be liable to pay the rent and other costs and charges.
Getting financial advice from your accountant will help you to determine what you can realistically afford in terms of rent and other costs and charges associated with leasing business premises, such as fit-out costs and outgoings.
Developing a business plan is critical to the success of any business. Financial forecasts included in your business plan will allow you to determine the timeframe and investment required to make a profit. This is especially important when negotiating a lease. If forecasts identify that five years is needed to reach your goal, you need to ensure you can lease premises for this period, and beyond if you wish to capitalise on the goodwill you have created. If not, your business may have to relocate or close down.
It is critical to check if there are government regulations to comply with. Local government areas will have zoning or planning regulations – where light industrial activities can take place for example. These can vary between councils so check carefully before deciding on a location.
The local council may also require you to seek approval for signage, address parking issues, gain building approval, and restrict the permitted uses for the building.
Our business licence finder can assist you to identify any specific regulations for your business.
It is important to research potential locations as well as your customer demographics. Knowing where your target customers are, their age, buying behaviours and habits can help you decide on an appropriate location for your business.
You will also need to consider the volume of foot traffic, proximity to public transport, availability of parking spaces, number of competitors, mix of neighbouring tenants and whether the premises are visible or too secluded. The type of business you intend to operate will affect your choice of location.
Business or commercial premises can include warehouses and factories, offices, retail shops, strip shops (a cluster of shops), shopping centres, and showrooms.
In Western Australia, many leases are regulated by the Commercial Tenancy (Retail Shops) Agreements Act 1985. The Act regulates retail lease arrangements between landlords and tenants and outlines some of their rights and responsibilities in relation to their lease. It mostly applies to retail businesses and businesses operating within shopping centres, though there are exclusions.
TIP: A retail shopping centre is a group of premises with a common landlord or on a single strata plan of which five or more are used for carrying out, wholly or predominantly, the retail sale of goods or a specified business.
Specified businesses currently include dry-cleaning, hairdressing, beauty therapy and treatments, shoe repair (which may include key cutting and engraving), the sale or rental of video tapes, DVDs, electronic games and other similar amusements.
Read more about the Commercial Tenancy (Retail Shops) Agreement Act 1985
When considering leasing business premises it is important to allow yourself enough time to properly research and evaluate your options. The same is true if you are considering buying an established business. You will need to conduct due diligence and review the terms of any existing lease agreement.
Typically, leasing premises involves:
- researching and inspecting premises
- obtaining preliminary documentation from the landlord, agent or seller regarding the proposed terms of the lease (eg, lease proposal, offer to lease)
- seeking legal, financial and business advice as to whether the proposed terms in the preliminary documentation are suitable for your business needs
- negotiating the lease
- preparation of final lease documentation
- fit-out of the premises and handover
Each of these stages can take a lot of time, so it’s important to factor this into your planning and not underestimate how long it will take to deal with each stage.
TIP: Do not be pressured into signing anything until you have sought professional advice.
A lease is a legally binding contract between you and the landlord. If you are considering leasing business premises it is strongly recommended that you seek legal, financial and business advice before:
- signing an offer to lease or any other lease-related document
- paying any deposit or other monies
- occupying the premises
- undertaking any works to the premises
Don’t underestimate the complexities of a lease.
Speak to a lawyer to make sure that the lease does not contain illegal or onerous clauses. A lawyer will be able to advise you on the terms to negotiate to ensure your business interests are legally protected.
Your accountant or financial adviser can provide advice on the financial aspects of the rent, rent review options and operating expenses over the duration of the lease. In addition, they can review your business plan forecasts to ensure you don’t financially over commit to a lease that is not suited to your business needs.
A business adviser can help you understand your business and practical requirements, including customer demographics, regulatory requirements, lease type and location. Contact our specialist commercial tenancy advisers for help.
TIP: To save some money, many businesses don’t seek professional advice. However, a poorly negotiated lease could be financially devastating and result in the end of your business. A commercial lease is complex - don’t rely on the advice of friends or family.