The Ins and Outs of Lease Agreements
When you need a physical space for your business operations but you don’t have the capital to purchase a premise, leasing business premises is a viable option. You need to ensure that your lease agreement is tailored to suit your specific business needs.
Here are some brief guidelines to help you understand the leasing process and negotiating lease agreements.
Step 1: Consider your leasing needs
It’s important to consider the physical features your business requires from its location. Here you must address the following:
- Will the premises allow your business to expand and grow?
- Can the lease be easily transferred to another person?
- Does the premise have the capacity to provide your desired return on investment over the life of the lease?
- Will the premise allow your business to generate enough income to pay all expenses and meet your target net profit?
The terms of the lease are crucial to secure a benefit for your business. Lease terms must be in writing and should, at minimum, provide the following:
- Security of tenure for the desired time;
- Agreed rent for the duration of the lease;
- Non-interference with the day-to-day running of the business;
- Non-imposition of additional financial burdens on the business; and
- If your business is in a shopping centre, ensure you are protected from competition from new tenants leasing in the same centre or group of shops owned by the same landlord.
Step 2: Inspect and research premises
It is common sense to properly inspect any potential business premises. Before you make any commitments, make inquiries into the lease and the property and compare it with other premises. You might also want to identify the features of your business so you will eventually lease a property that is best suited to your businesses needs.
Step 3: Obtain preliminary documentation
Once you have found the ideal premise you must document the terms of the lease. Here, if your businesses lease is subject to the provisions of the Retail Leases Act 1994 (NSW) you must comply with the documents required by the Act. For the Act to apply to your business premise, your business must either be:
- Included in the extensive list of businesses specified in Schedule 1 of the Act; or
- Conducted in a premise located in a retail shopping centre.
If you are unsure whether your business premise or lease is covered by the Retail Lease Act 1994 or you need assistance with the required documents, please contact Butlers Business and Law and our commercial lawyers can advise you.
Step 4: Obtain professional advice
Before you agree to a lease it is advisable to seek professional legal advice in order to review its terms. This step can protect you from technical complexities in the lease. Contracts may seem simple, however, words used in legal documents may vary in meaning from their common usage. Having professional advice under your belt can also help you with negotiating more favourable terms of the lease, and will help you better understand your legal and financial obligations.
It is also recommended to gain professional advice regarding your finances. Accountants can help your determine whether your business can meet rent requirements and other costs of the premise over the term of the lease.
Step 5: Negotiate the lease
There is no requirement for a prospective tenant to accept the first offer put to them by a landlord. You are free to negotiate the terms of the lease for the betterment of your business until you and the landlord are satisfied. If the conditions of the proposed lease are not acceptable and cannot be negotiated, you can walk away.
Step 6: Preparation of final documentation
Once negotiations are completed the final form of the lease will be prepared for signing by the parties to the lease. Here, it is advised you obtain legal advice.
Helpful Hint: Always retain a copy of any document bearing your signature.
Step 7: Fit-out of the premise
Fit-out of the premise can be a major cost and should be recovered from the business. Some fit-out costs, such as the cost of moving plumbing, are often overlooked, so ensure you have an accurate fit-out budget that leaves you with sufficient funds to operate your business.
If the Retail Leases Act 1994 applies, in situations where a lease specifies that the landlord must contribute to the fit out costs, the Act stipulates that the maximum amount of the landlord’s contribution is to be agreed by the parties before the lease is entered into. Meaning, the landlord is not liable to pay any amount greater than the agreed figure, even if the fit out costs are more than estimated.
If you’re dealing with a lease agreement contact Butlers Business and Law on (02)49 7002 or fill an enquiry form out on our website.
Our commercial lawyers can help you understand your financial and legal obligations, and can assist you with the ins and outs of your lease agreement.