Tips for Negotiating a Commercial Lease
A commercial lease can be negotiated. Often, the landlord will hire a leasing agent who will represent the landlord on lease negotiations. The process often starts with the tenant completing an offer to lease or signing a Heads of Agreement to Lease.
It is important to note that some commercial premises are categorised as ‘retail premises’ and leases for these premises are regulated under legislation. For non-retail premises, the content of leases can have large variations.
Map out the costs payable
‘Rent and outgoings’ are not the only costs that are payable by a tenant under a commercial lease. There are other upfront costs and ongoing costs. Upfront costs can include fit-out costs, security bond, insurance, legal fees, car park fees and levy etc. You could consider negotiating a rent-free period, rent reduction, or fit out contribution.
Terms of the lease that could affect a tenant’s ongoing cash flow are terms such as length of the lease and options to renew, rent review dates and methods, repair and maintenance obligations, marketing levy (if any), refurbishment, make good obligations etc. These all have a potential to add additional cost to your lease and affect your business’ cashflow and profitability.
The description of the ‘permitted use’ of the premises needs to suit your business’ operations. Keep the description broad if you wish to use the premises for a variety of purposes.
Have you considered if there are any other businesses near the location of your premises that are in competition with you? Does the landlord also own those premises? This often applies to shopping centres, however, if your landlord owns the properties near your premises, it is advisable to negotiate an ‘exclusivity of trade’ clause so that the landlord cannot lease out their other premises to a competitor of yours.
What if you wish to exit your lease early or sell your business to someone else? Consider including early termination rights or rights to assign or sublet your premises.
A redevelopment or relocation clause may permit a landlord to terminate a lease early so they can redevelop the area. This means you may be forced to relocate or close your business. You should give serious consideration to the risks and costs associated with this clause and negotiate adequate compensation provisions.
Make sure you have a written lease
A Heads of Agreement for Lease or an Offer To Lease does not necessarily equate to a lease. Representations made by the Real Estate Agent during negotiations does not necessarily mean it will be reflected in the lease so you should always read your lease to make sure it reflects what you have negotiated. If you are leasing a retail premises, make sure you also receive a Disclosure Statement with the retail lease.
For many businesses, their leasing obligations are a large part of their financial commitments. Thus, it is very important to review the lease not only from a commercial point of view, but also from a legal point of view.
It is important to look at a commercial lease as a whole rather than simply the rent payable. Whilst the commercial decision to rent is ultimately between the landlord and the tenant, a lawyer can provide you with valuable advice on key terms of the lease and how that could affect your business. A lawyer can also advise tenants if they can take further measures to protect your rights such as registering a caveat over the property.