If you’re a tenant applying to lease a commercial or retail premises, you may receive a lease offer (or heads of agreement) before entering into the lease. This is a short document that sets out all the commercial terms.
Once this document is agreed, the landlord will give you a lease based on these commercial terms. Therefore, it is very important to negotiate favourable terms in the offer as once the offer is signed, it can be much harder and more costly to negotiate the terms of the lease.
This article will set out ten key considerations to look out for when reviewing your lease offer. If the premises is considered a retail premises, the lease must comply with various retail legislation, which differs by state.
Issues to consider
1. Tenant structure
Will you enter into the lease as a company or an individual? If you enter as an individual, you will be personally liable for all obligations and money owed under the lease. For example, if you fall behind in rent, the landlord can claim this from you personally. This can put your assets, such as your house and car, at risk.
If you do not have a company, it’s a good idea to set one up to enter into the lease. This will reduce your personal liability and may also have better tax implications. However, note that the landlord may ask you or the directors of the company to personally guarantee the lease. As such, you should speak to your lawyer and accountant about the best way to structure your entity to protect your personal assets.
2. Permitted use
It’s important to consider whether the permitted use will be broad enough to cover any future or anticipated use for the premises. For example, if you run a yoga studio and plan to expand into pilates, the permitted use should be expanded to include pilates. Otherwise, if you are operating outside the permitted use you will be in breach of the lease.
3. Commencement date
The commencement date should be the closest date to when you will take handover of the premises. From the commencement date, you will be responsible for all obligations under the lease, including paying rent and outgoings, even if you are not ready to use the premises.
Consider any events that must happen before the commencement date such as landlord works, fitout or obtaining council approval. If this is the case, then you should try and ensure that the commencement date is conditional upon these events occurring.
4. Rent review
Do some research to ensure that the rent is the market rate for the area. The rent review during the initial term may be adjusted each year either by CPI or increased by a fixed percentage. If it is a fixed amount, this can range between 3% – 5% depending on the area, noting the higher amount is more common in shopping centres. It’s a great idea to engage a specialist leasing consultant at this stage to help you negotiate the most favourable rent.
5. Option term
It’s important to consider how long you want to lease the premises. If you’re not sure, it’s always better to have a further option period so you can renew the lease if your business is going well.
In the case of retail leases, some states have a minimum term requirement. For example, in Victoria this is 5 years.
6. Security deposit
It’s very common for tenants to provide two or three months’ worth of rent as a security deposit or bank guarantee to the landlord. You may also be required to provide one month’s rent as a deposit when you sign the offer. You should check whether this is refundable if negotiations break down.
7. Outgoings
As a tenant, you’re required to pay outgoings which include services, council rates, some taxes and other charges directly related to the premises. You should only pay a percentage based on the net lettable area of the premises in proportion to the building. For example, if your premises is 100sqm of a 400sqm building, you should be paying 25% of outgoings.
This should be confirmed by survey plan (preferably at the landlord’s cost) to ensure it is accurate and you are paying the correct amount. If it is a retail lease, every state has different legislation on what can be passed on to the tenant.
8. Tenant and landlord works
The fitout and other works that the landlord and yourself will be carrying out should be clearly set out in the lease offer. This will provide certainty over who is responsible for the works and associated cost, and avoid arguments down the track.
9. Legal costs
Ideally, each party should bear their own costs for the preparation, negotiation and execution of the lease and associated documents. If it is a retail lease, some states such as Victoria will prevent the landlord from passing these costs on to you.
10. Maintenance / air-conditioning
We suggest doing an inspection and carrying out a condition report to document any issues with the premises. If you are concerned about the structure, you can include a special condition that the Landlord will maintain the premises in a structurally sound and water tight condition.
If there is an existing air-conditioning unit in the premises, you should consider obtaining a guarantee from the landlord that the unit is in good condition at the start of the lease and that you will not be responsible for any capital repairs, such as repairing or replacing the air-conditioning unit.
Should the offer be binding or non-binding?
The offer may state that it is either binding or non-binding. If it is binding, this means you intend to be bound by the lease documents before seeing them and cannot back out.
As such, it’s a good idea for the offer be non-binding. This gives you an opportunity to review and negotiate the lease documents and potentially walk away if negotiations fall through. In this instance, you will often have to forfeit your deposit to pay the landlord’s legal costs to prepare the documents.
What next?
A lease offer should set out the commercial terms agreed by the parties before they enter into the lease. It is important that you engage a solicitor early on to review your offer and ensure it has all of the necessary terms included.
Legalite offers fixed fees to assist with negotiating lease offers. For a quote, or if you have any questions, contact us at [email protected] or 03 9448 2393.