Optimising Your Commercial Lease
Tips on avoiding common mistakes made by ‘others’
Hopefully you’ve first read our article, Commercial Leases 101’ so you have a good grasp on the basics of entering into a commercial lease. Now it’s time to focus on some of the details and importantly the areas where others (not you of course) make costly errors when relocating a business and signing up to a commercial lease. By avoiding these pitfalls you can actually optimise your lease and ensure you take full advantage of the opportunities available.
Allowing Enough Time
Whether you’re relocating your business or setting up a new operation, the entire process can take quite a long time and many people get caught out by not allowing sufficient time for the entire process. It can take 6-18 months or longer, to find the right premises, negotiate the lease, organise your fit out and move in and be operational. The longer you give yourself for the process, the less likely you will be caught in a panic and be forced into signing up to less than ideal conditions in your lease. Landlords are quick to pick up on anyone in a bind and will be less likely to offer incentives.
We advise, that if you are considering re-locating, first come and see us and bring your current lease and we will review the details and explain what is involved in either taking up options on your current premises and/or the costs of not renewing, making good etc, so you are in the best position to make an informed decision on proceeding.
The Right Advisors
Ensure you select the right team to assist, advise and guide you through the entire business relocation process. Starting of course with your lawyers, McLaughlin & Associates! Commercial leases are binding agreements with a lot of fine detail which needs legal attention. If you’re looking at a number of premises, we can review the various options and of course assist in drawing up the final lease and registering the lease if required.
Unfortunately, many people who are new to leasing premises will, on the say so of the real estate agent (who remember is acting for the landlord) sign an Agreement to Lease not understanding that it is in itself a legally binding document, then come to us only to find that certain matters have been omitted from the original agreement.
Do not let yourself be pushed or rushed into signing an Agreement to Lease by the Agent. We can review and advise our clients on an Agreement to Lease within 24 hours of receiving the document.
Many businesses choose to use a tenant advisory service to assist them through the process. This can be a very beneficial service as long as the business is independent and working in your best interests alone. Check their credentials to ensure they are not aligned with any property development companies or building owners and if so, may steer you to their preferred properties.
Check the Details
As mentioned in the earlier article, before signing the actual Lease, you may be asked to sign an Agreement to Lease or Heads of Agreement. This is a binding document and you need to ensure the details are correct:
- Correct name of the leasing entity. Check with your accountant to ensure that you have the correct entity named in the agreement. That is, is the lease to be in the name of the trading company, a company as trustee of a trust, joint names, sole name, etc. We see cases where a client has signed an Agreement to Lease under his own name only to be subsequently told by his accountant that for taxation purposes it needs to be registered in a different entity. That can create problems which can be avoided by checking upfront.
- Rent Details. Is the amount of rent inclusive or exclusive of GST? Commercial rents can run into a considerable business expense and overlooking this aspect can seriously affect your budgeting.
- Type of Business Specified. Does the lease clearly specify the type of business you will be engaging in both initially and into the future? You need to be both specific and in some cases, wide ranging in the description of the type of business, services and/or goods you wish to sell from your premises otherwise you may find yourself excluded from being able to sell or offer certain services from your premises. If you have plans to expand, make sure those plans are reflected in the lease.
Know Your Business Plan
Setting up business premises, no matter how small your business, can be a costly experience both in the initial set-up and fitout and also in the downtime. So you need to have a clear vision for your business today and for the entire duration of the lease you are entering. If you plan to grow and expand, does the premises have space to cater for your growing plans. Ensure they are growing plans and not growing pains by checking that if you plan to put on more staff you have office space for them, if you plan to expand your service offerings or change the type of business, ensure the premises permit such business activities.
Budget Forecasting – Outgoings
There is a lot of ‘fine print’ in commercial leases and many people do not understand that when premises are advertised for rent they can be spoken about as either being inclusive or exclusive of outgoings or as sometimes stated “gross” or “net”. If it is gross it is inclusive of the outgoings and is the total amount or net being that it is exclusive of outgoings and outgoings have to be added on.
Premises which may look quite cheap because of a low base rental figure can in some cases end up being exorbitantly high when outgoings are factored into the rental price.
If comparing premises, make sure you compare the outgoings and ensure you allow for these in your budgeting.
If you want to be the only business of your kind operating from that shopping centre, then your wishes need to be clearly stated in the lease and definitely discussed in initial conversations with the landlord to avoid last minute issues. The last thing you want is to open your business only to find in six months’ time that the landlord has let another shop in the same centre selling the same goods as you. Unless you have an exclusivity clause, the landlord has the right to do so and there is nothing you can do about it.
Lease Terms Suit Your Business Plan
We’ve stressed the importance of knowing where your business will go into the future and that is critical in regard to the Terms of the Lease. What is the term of the Lease and are there any options to renew the Lease? Commonly, leases can be expressed to be, for example 3 x 3 (a three year term with an option for three years), 3 x 3 x 3 (a three year term with two option periods of three years each), 5 plus 5 (a five year term with a five year option) etc.
Before signing, make sure these terms are in line with your business objectives.
If the Lease provides for you to have an option to renew the Lease after the end of the term, then consider closely the manner and timing which the tenant must give to the landlord in the event that they wish to renew the lease for a further term. We have had situations where clients have failed to strictly comply with the requirements to exercise their option and the landlord has seized on that opportunity to refuse them the automatic right to continue leasing the premises.
Options can be an asset to your business if you plan to sell the business within the leasing period. Selling a successful business located in premises with a long-term lease/options already negotiated, can add value at the time of sale.
The Bee or the Honey Pot?
When it comes to incentives, which are the norm with commercial leases, you need to be aware if you are the bee or the honey pot! It is in the interests of the landlord/building owner to not only have their building fully tenanted but to have high profile tenants. If in a shopping centre, high profile tenants attract other retailers and shoppers, if an office building, high profile tenants add prestige and value and attract others who want to bask in the image of their building neighbours.
Like bees to a honey pot! So are you the bee or is yours the high profile honey pot? Knowing this places you in a better negotiating position when it comes to incentives.
Whatever the scenario, consider what is on offer in regard to incentives and truly analyse the cost-benefits of each one. Incentives can include rent-free periods which can be very important if you are planning a time-consuming fit out. Not so important if it is to be a quick move in.
Some offer a straight-up cash incentive. The reason for cash v rent-free will be based on the budget that they can draw the funds from. There may also be offers to do the fit-out for you – that is an offer to be wary of. Their contractors may not complete the job to your level of satisfaction and the offer may come with strings attached.
Whatever incentives you agree on, make sure they are detailed in the lease
Make Good Conditions
One condition which often catches people by surprise, unfortunately when it’s too late, is the make good clause. This refers to you, the tenant, having to return the premises in the condition that you took it in, at the termination of the lease. Often there is no allowances for normal wear and tear and you will also have to completely remove your entire fit out and other installations. This can be an expensive process so ensure you have those details clearly specified in the lease and take a lot of photos, in the company of the landlord, at the time of agreeing to the lease, so the condition you took the premises is clearly documented.
While you are largely responsible for maintaining your own premises, the landlord will be responsible for maintenance of the common areas, exterior and other areas and some services. Ensure that this service and the level of this service is written into the lease.
For example, maintaining the exterior of a building in a clean and neat appearance may affect the entire image of your business to customers. Same goes for lift foyers, communal toilets and other spaces. Check out the reputation of the landlord to ensure they are up to your standards and prompt in making repairs etc. When it’s the height of summer and you’ve been waiting for days for the landlord to fix the air-con, you will definitely be demanding some level of compensation!
Are there any special condition which you want included? For example, you may wish to include a due diligence clause whereby you have 7 days from signing the Agreement to Lease to carry out your due diligence. This allows you to ensure that you are satisfied with the location of the premises, rent represents good market value etc.
You may also want (and we would recommend) the Lease to be subject to your solicitor’s perusal and satisfaction of its terms.
If you are considering moving business premises or currently considering a commercial lease, please contact John McLaughlin, McLaughlin & Associates Lawyers, email@example.com 07 3808 7777 for a confidential discussion regarding how we can assist you.