Written by Harry Croft, Alyce Evans and Jennifer Tutty, Principal
Signing a lease is an exciting part of any individual or business’ life. It is a big step. A big, binding step.
After signing a lease, you won’t be able to amend or vary any lease terms unless the landlord agrees to it. Therefore, the last thing anyone wants is to realise (after it’s too late), that they’ve made a mistake. Perhaps the lease is for way longer than you actually need. Or, the council informs you that you can’t actually use the space for the purpose you intended.
To avoid frustration, disappointment and (often) unforeseen expenses, it’s crucial that you understand and are satisfied with all of the lease’s terms before you sign. Fortunately, there are a few key questions that you can ask to help gather the information you need.
In this blog, we explain the key questions to ask your landlord or agent before you sign a lease for your business.
What is a Lease?
To take things back to basics: A lease is a legal agreement. It typically involves a landlord providing a tenant with an exclusive right to use their property for the term of the lease. This means that, although the landlord retains ownership of the property, you (as the tenant) have the right to occupy and use the land without interference. If you breach the lease, the landlord has a right to terminate the agreement.
Key Questions to Ask Before You Sign a Lease for Your Business
Usually, you won’t be able to change any lease terms after signing, unless the landlord agrees. Instead of living with regret, take charge of the situation from the outset. Ask your landlord or agent questions before you sign your lease.
Get the answers you need to make an informed decision and negotiate if necessary.
Some of the key questions to consider include:
1. Is my Heads of Agreement (also known as a Lease Proposal or Terms Sheet) binding?
Before you sign a lease, you may be asked to sign a ‘Heads of Agreement’ in relation to the lease. These documents can take various forms and names. Look out for a ‘Lease Proposal’, ‘Terms Sheet’, or any other written document you are asked to sign before you see a copy of the actual lease. These documents will contain key commercial terms of the lease, such as rental payments, options and bonds.
Heads of Agreement are often binding. Therefore, it is a good idea to get preliminary advice and have documents reviewed before signing any Heads of Agreement and lease documents.
2. Can I use the premises for my intended purpose?
If you are a business entering into a lease agreement, this is a particularly important question to ask. Most businesses rent spaces for a specific use. Additionally, premises often won’t immediately be fit for the prospective tenant’s intended use.
Signing onto a lease and then not being able to use it for your intended purpose is a disaster you definitely want to avoid.
Before signing a lease, have a think about what is required to get the space fit for purpose. For example, you may require approvals, licences, landlord’s works or your own fit out.
Next, make it clear to the agent or landlord that you are entering the lease subject to these things occurring. In legal lingo, these conditions are known as ‘conditions precedent’.
If you make the lease subject to conditions precedent, and these conditions are not met, you will not be bound to the lease. Where possible, conditions precedent should be included in the lease itself.
Any conditions precedent you request will be dependent on your individual needs, circumstances and intended use for the space. For example, you may request that the commencement of the lease is subject to:
– Obtaining the transfer of a liquor licence or other licence;
– Obtaining any necessary planning permits and approvals;
– The landlord completing works or maintenance; or
– You completing an office fit out.
Landlords will often push back on the inclusion of conditions precedent. If they do, you will need to think carefully about signing the lease and feel very confident that you will be able to obtain all necessary and relevant consents, approvals and permits. A good place to start is contacting the local council for a discussion.
3. How long does the lease run? Are there any options for further terms?
In a lease agreement, the length of the lease will generally be referred to as the ‘term’. Make sure you are crystal clear on the length of the term. When does it start? When does it end?
When does the term begin?
Once you sign the lease, your financial obligations to pay rent and outgoings begin. From this point, they continue for the duration of the term. Therefore, make sure you know exactly when your obligation to pay rent begins and whether you have any incentives or rent-free periods. Additionally, identify whether you have (and need) an early access period to the property before the commencement date. Such access might be required if you need to complete fit out works.
Options to renew
It’s always good to have options – particularly in a lease! Before signing, identify whether or not you have any options to renew the lease for further terms. In other words, after your lease ends, do you have a contractual right to request any extensions? When negotiating your lease, we recommend asking for as many options as possible.
Signing a long lease vs. signing a short lease
Be really careful before agreeing to long terms such as 10 years. This is a massive commitment! For our business clients, we recommend that each term and option is around 3-5 years. If you are not sure about whether your business will be successful long-term, you may like to ask for shorter options (such as 1-3 years) or an initial 1-2 year period followed by longer periods of 3-5 years.
4. What are my ongoing costs?
In addition to rent, it is likely that you will be required to:
– Pay or contribute to outgoings for the term;
– Provide a security deposit for at least 3 months’ rent (in the form of a cash deposit or bank guarantee); and
– In some circumstances, provide a personal guarantee for the tenant’s (i.e. your) obligations under the lease.
Does your lease fall within a retail leasing regime?
In most Australian states, if the lease falls within a retail leasing regime, then the landlord is required to provide you with some form of estimate of your ongoing costs during the term of the lease. Make sure you have been provided with these details. Read them carefully and ensure that you understand them. Before signing a lease, we recommend having a discussion with the landlord about who is required to pay for repairs to any equipment, fixtures and fittings at the premises.
5. What do I need to take with me when the lease ends?
At the end of the term, most leases will require you to leave the space as you found it. This applies whether you’re renting a commercial or residential space. If you’ve completed a fit out, it’s likely that you will have to take this with you too. Additionally, you may be required to repair any damage you have caused, remove or reinstate flooring and repaint the premises.
Before signing, understand the extent of these obligations that will be triggered when your lease ends. Factor in their potential costs and what will happen if you do not comply.
For example, often with a fit out, if you do not remove it at the end of the lease, ownership of the items will go to the landlord. The landlord could then either keep those items or choose to have them removed at your cost. If you would like to leave the fit out ‘as is’ when the lease is over, you should negotiate this into the terms of the lease.
6. Can I sublease or license the space to someone else?
Subletting and licensing of rental spaces was becoming more and more common pre-COVID-19. The pandemic has seen this trend rapidly accelerate, particularly in the business realm.
As the world embraces new ‘hybrid’ ways of working, more co-working spaces are showing up. Many employers are looking to downsize and are moving into shared spaces. Meanwhile, small to medium businesses are looking to generate alternate income streams by subleasing or licensing their space to others.
In most cases, you will need the prior written consent of the landlord to do this and this process will be set out in the lease. If you know you want to sub-lease or license parts of the premises, you can plan ahead. Negotiate your right to sub-lease and license with the landlord. Before the lease is signed, you could ask for the terms of the lease to state that the landlord’s consent is not required each time you decide to sub-lease or license.
In Conclusion
Whether or not the terms of a lease are suitable is dependent on each business’ circumstances. If things get confusing, sit back and think about what you need from the space and what you are willing to commit to. With a little planning, the excitement of signing can continue throughout the term of the lease.
Written by: Harry Croft, Alyce Evans and Jennifer Tutty, Principal
Further Information
If you have any questions relating to commercial leases or retail leases (leases for your business), or would like assistance reviewing a lease agreement , please contact us through our online form or via email at hello@studiolegal.com.au.
DISCLAIMER
The information in this article is of a general nature. It does not constitute formal legal advice, and should not be relied on as such. Please see the full disclaimer in our website terms. Please contact Studio Legal if you are seeking advice about a specific legal matter.