Before you sign a commercial lease, check seven things: the term and any options to renew, the rent and how it will increase, your share of outgoings, the security you'll need to give (such as a bank guarantee or personal guarantee), what fit-out you're allowed to do, your make-good obligations at the end, and how you can get out early. Get your business lawyer to review the lease before you sign, not after.
When you lease a commercial property (such as an office, warehouse or retail shop), you can either negotiate the terms yourself, or ask your business lawyer for help. If it's your first lease, get your business lawyer on board early, so you know what you're signing up to and the extent of your liability.
There are legal rules about what a landlord can and can't offer a tenant, and what can and can't be included in the lease documents. These rules vary between states and territories, and there are extra protections for retail premises. Depending on where you are, retail tenants may be entitled to a disclosure statement before they sign, a minimum lease term, and limits on the costs a landlord can pass on. Your business lawyer can explain the rules that apply to you and make sure the legal requirements are met.
During my years in legal practice, I've seen clients caught out or taken by surprise at various points in their commercial leases. Most of the time, it's because they weren't fully aware of their obligations under the lease. If you're thinking about entering a commercial lease, here are my 7 tips for what to check before you sign.
1. Term of the lease and options to renew
Be clear on how long the lease is for, and whether it includes an option (or options) to renew. If it does, note exactly what you have to do to exercise the option, and when. Miss the deadline or the formal requirements, and you could lose your right to a further term.
2. Rent
Know the rent and whether it includes GST. Note the rent review dates and how increases are calculated (a fixed increase, CPI or a market review). Factor those increases into your business plan and financial projections.
3. Outgoings
Make sure you understand which outgoings you'll pay (such as council rates, water, insurance and building maintenance), what proportion you're responsible for, and the base year used. Not understanding this can leave you with an unexpected cost down the track.
4. Security
Understand what security you'll need to give before you sign. Will you need a bank guarantee or a cash bond, and for how much? If the tenant is a company, will the directors be asked to give a personal guarantee? A personal guarantee puts your own assets on the line, so make sure you understand what you're agreeing to.
5. Fit-out and tenant works
If you want to do your own fit-out, check that the lease allows it. Be very clear on what you can and can't do, and what approvals you need first.
6. Make-good
Before you carry out any works, understand what you'll need to do at the end of the lease to return the premises to their original condition. Unexpected make-good obligations can cause delays and be a significant, unplanned cost when the lease ends.
7. Exit strategy
If your circumstances change and you want to end the lease early, or sell your business, know what you'll need to do and your financial exposure. Check whether you can assign the lease or sublet, and what the landlord's consent requires.
Take the time to talk to your business lawyer at the start of the process, and certainly before you lock yourself in, so you don't need to call on them later when something unexpected comes up. If you'd like a lease reviewed before you sign, book an introduction call.
This article provides general information only and does not constitute legal advice. Your obligations depend on your specific circumstances and the state or territory your premises are in.
Frequently asked questions
Should I get a lawyer to review a commercial lease?
Yes, ideally before you sign or pay a deposit. A lawyer can explain your obligations, flag unusual or one-sided terms, and help you negotiate changes while you still have bargaining power.
What is a make-good clause in a commercial lease?
It's your obligation to return the premises to their original condition at the end of the lease, for example by removing your fit-out and repairing any damage. It can be a significant cost, so understand it before you start any works.
Do I have to give a personal guarantee for a commercial lease?
Landlords often ask company directors for a personal guarantee, which makes you personally liable if the company can't pay. It's sometimes negotiable, for example by limiting the amount or how long it lasts, so get advice before you agree.
