Ten key considerations when leasing commercial property
By Lindsay Kotzman, Gessica Giordano and Celia Welch.
P&B Law Founder and Partner Lindsay Kotzman, Senior Associate Gessica Giordano and Associate Celia Welch combine their extensive legal expertise with experience in business operations, event management and professional services. Their clients value their broad commercial perspective and ability to ensure legal advice is sound, strategic and pragmatic.
Whether you’re starting up, changing direction, growing or consolidating – renting the right premises can create space for your business to grow. Having recently moved offices ourselves, we know first-hand the opportunities that leasing new business premises can offer. But before you get deep into fit-outs and furnishings, make sure you have considered some of these common leasing traps we’ve seen catch tenants out. The key takeaways as you will see are “do your homework” and “get everything that’s been promised by the landlord in writing”.
Commercial or retail lease: the legal framework in Victoria
In Victoria, the Retail Leases Act 2003 (RLA) applies mainly to small to medium retail businesses.
If you’re outside Victoria, most other states have similar frameworks, but the details do vary from state to state, so it’s important to get advice from experts familiar with your location.
And just a note on terminology – ‘retail lease’ refers to a lease that comes under the RLA, while a ‘commercial lease’ is any business lease that falls outside it.
1. How does your business structure affect leasing arrangements?
One important consideration is that only certain legal entities can sign a lease. These include a trustee on behalf of a trust, a company, or an individual person. But, for example, a lease can’t be in the name of a partnership as a partnership is not a separate legal entity like a company. Typically, in such a case the lease will name all partners as the tenants and each partner will be jointly and severally liable. One partner could sign the lease in their own name, but that could cause problems if there were ever a partnership dispute. It’s usually preferable for the partnership to set up a trust or trading company to hold the lease.
If you’re a sole trader, the lease needs to be in your own name, not your business name. That means you could be personally liable for the costs of the lease if the business cannot pay them.
As companies have limited liability, landlords often require personal guarantees from the company’s directors as well as a security deposit.
2. Does the Retail Leases Act 2003 (Vic) apply?
A threshold issue is whether the RLA applies to your lease. This is not always obvious as it will depend on the definitions in the RLA, the exclusions, the various Ministerial Determinations and case law. You should get advice before signing a lease.
If the RLA does apply, it provides you with statutory protections which the landlord cannot exclude in the lease and which you may not otherwise be able to negotiate with the landlord. For example, if the RLA applies, a landlord cannot pass its land tax liability to you, or its legal costs for the preparation of the lease. The RLA also limits the ratcheting up of rent on market reviews.
3. Can you operate your business from the premises?
This sounds obvious but check carefully and never assume that you can. We’ve seen business owners make this mistake and find themselves unable to run their business as planned from their new premises.
In one case, the business owner didn’t realise they needed a planning permit for their operation as well as permission under the lease. They were understandably horrified to receive an enforcement notice from the local council after they had already spent $200,000 on their fit-out.
The lesson here is to check both the permitted use in the lease and whether the use is permitted under the relevant zoning, and if so, whether a planning permit is required. Remember signage may also require a planning permit.
Also consider access and walkways, whether there is sufficient parking and of course if any other permits, licenses and registrations are required, for example, for food preparation or service of alcohol on the premises.
4. Check the current condition of premises and proposed fit-out
Remember, you must work on the principle that you take the premises as you find them.
Therefore, do a full investigation for leaks, general weatherproofing and structural soundness. Put in writing in the lease any repairs you require the landlord to do to make the premises suitable for occupation. Further, if you are planning significant alterations to the fit-out, we recommend getting the landlord’s agreement up front, especially for any structural changes, to avoid the risk of the landlord not approving your plans after the lease is signed.
5. Lettable area – what will you have access to?
If the premises only forms part of the lettable area of the land or building, ensure that an up-to-date plan is attached to the lease correctly identifying the lettable area of the premises. The plan should also identify any allocated car parking spaces and shared areas such as toilets, kitchen, reception areas etc. This can help avoid disputes about which areas you have exclusive use of or merely shared access to. You don’t want to plan your business around having access to the rear lane, for example, and find that it is exclusively for the use of another tenant.
6. Does the existing plant and equipment meet your needs?
You’ll need to know the condition of the structure of the premises, and any fixtures, services and plant and equipment of the landlord. You should ensure that they are all in good working order at the start of the lease. Make sure you also know who is responsible for maintaining these.
Under a retail lease, the landlord generally only needs to maintain these in the condition they were in at the start of the lease. If they’re not up to standard, you will need to negotiate or plan for any repairs or replacement. It is essential you know what’s there and whether it meets your needs.
Always thoroughly inspect the premises in person and obtain a condition report from the landlord recording the condition of the premises at the start of the lease with photographs attached as agreed by the parties. Ask for maintenance reports on key pieces of plant and equipment. You never want to discover after you’ve signed the lease that something like the air conditioning is not fit for purpose or has not been properly maintained. You could face expensive upgrades or replacement, not to mention costly disruption to your business.
7. How long do you want to stay?
Look at the term of the lease itself and whether you have options to renew.
Retail leases must be offered for at least 5 years (including options to renew), though tenants can agree to a shorter term by providing the landlord with a certificate in accordance with section 21 of the RLA. There is no minimum term for commercial leases.
Our advice is to negotiate as many options as possible. Even if you don’t think you need a long lease, options give you the right to make choices as your business grows. And if you decide to sell the business, they add to the value of the business and make it easier to sell.
8. Find out about encumbrances
Always check the landlord’s title, including whether the property has a mortgage. If so, we recommend getting the mortgagee’s (lender’s) consent to the lease.
If the mortgagee consents to the lease they are generally bound to honour its terms. If the landlord defaults and their lender takes possession and sells the property, they must sell it subject to the lease. Without the mortgagee’s consent, the lease is not binding on the mortgagee, and they can demand that you vacate the premises so they can sell the property with vacant possession. This can be very disruptive to your business.
9. Check for early termination clauses
Landlords may also want to include an early termination clause, which gives them the right to terminate the lease early, for example, if the site is scheduled for redevelopment.
This may be something you’re happy to trade off for rent or other conditions, but make sure you’ve considered whether you would be prepared to move on 6 months’ notice.
10. Consider the end of lease provisions
You also want to know what’s required at the end of the lease (the make-good provisions). Check the wording in the lease carefully. For example, you don’t want to find yourself responsible for repainting or recarpeting the entire tenancy at a cost of tens of thousands of dollars.
Get the right advice for your commercial leasing arrangements from P&B Law.
When you’re planning a business move, experienced legal advice can help you negotiate a lease that fits your business. At P&B Law, our commercial lawyers have the experience and skills you need to help you avoid potential pitfalls and take advantage of the opportunity new premises present. Contact us today to benefit from our knowledge.