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Commercial Leases – What you need to Know

Background

The terms of commercial leases vary greatly, so it’s important that you read the terms of your agreement to ensure that they reflect the agreed terms of occupancy that you have reached with the landlord (or the “lessor”).

The terms of the lease will provide you with the legal right to occupy the premises in question and typically impose a number of obligations upon the tenant (or “lessee”). This is where a commercial lease tends to differ from a residential lease – the former is not necessarily a standard document. This can be beneficial however in that the terms are negotiable before the parties have signed on the dotted line.

You should also be aware that as at 1 May 2003, the Retail Leases Act 2003 applies to many commercial lease agreements in Victoria. This Act affects many of the considerations listed below.

What sorts of things should you consider before you sign on the dotted line?

1. Determine the length of time you wish to occupy the premises and see if that period is suitable for the lessor. You may like to think about how much time you would need to spend on the premises before you recouped any costs you have outlaid in order to make a profit. You may however also need to negotiate for some flexibility, given that once you sign the lease, you’re locked in. If you are starting a new business, it is generally a good idea to negotiate for a shorter term in the lease with an option to extend.
2. Determine how much rent you can afford to pay to the lessor for the occupation of the premises. Ask how the rent is calculated (for example, is it according to your annual turnover?) and when it will be reviewed (for example, rental payments may be reviewed annually). Find out whether, in the event that your premises become unusable, you will have to continue to pay rent.
3. Consider the other outgoings you will have to pay, to ensure you don’t over-extend your budget after rent. For example, find out how much you would have to pay in respect of rates, tax, insurance, management fees, levies, gas, electricity, cleaning, etc. It is also likely that you will bear the burden of paying for the stamp duty on the lease.
4. Find out who is liable to pay GST on the rent. In most cases, the lessor will incur this cost and wish to pass it on to the lessees. If it is the case that you are liable to pay GST on your rent, you may be entitled to claim a GST credit.
5. Find out whether you will be responsible for any repairs on your premises. These can be costly and unless you are aware of exactly what you are agreeing to, you may later find that you have accepted obligations beyond your means in relation to the upkeep of the place.
6. The lease should describe your intended use of the premises. That is, what sort of business you intend to run from there. You should check that the use of the premises is permitted by the local council, as this is not something that is necessarily checked by the lessor. In some cases, you may even need council approval to set up your business on the premises. You should also check whether there any limitations on the hours at which you can access your building.
7. What sort of insurance you require. For example, if you have people drop in to your premises, you may need public liability insurance in case someone injures themselves there. Find out whether you are also expected to contribute to the landlord’s insurance.
8. What legal costs you may be liable to pay. It is common, for example, to have to pay for the lessor’s solicitors fees in preparing the contract.

How to protect yourself if you decide you’re ready to sign the lease

You should seek both accounting and legal advice to make sure you have chosen the most cost-effective and appropriate business structure, the most tax effective way to pay rent and have generally entered into a fair and commercial agreement that is workable for you.

Review the description of the leased premises to make certain that the description is specific and there will not be a question later as to the area leased. Also make sure that both parties are correctly named.

Inspect the premises and take photographs of the place to ensure that you are not later found to be liable for any pre-existing damage.

Talk to the other lessees to gauge whether there are any issues with the landlord and or the building. There’s no harm in asking!

Check that everything you agreed upon with the lessor appears in the contract and ensure you understand your rights and obligations arising out of the agreement.

Be sure to consider all the factors listed under What sorts of things should you consider before you sign on the dotted line? This is not an extensive list. We will be able to assist you with any specific issues arising out of your particular lease.

Where can I get further information or assistance?

Navigating your way through a commercial lease can be difficult and given that you are entering a potentially long-term, legally binding commitment, you should get a full understanding of the legal implications of entering such an agreement. That is where we can assist.

You may also like to visit the Victorian government websites at either:
www.businessaccess.vic.gov.au or the Office of the Small Business Commissioner at www.sbc.vic.gov.au.

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