4 Critical Due Diligence Checks Before Entering a Commercial or Retail Lease
Leases are legal agreements that can remain binding for decades. They form the cornerstone of many new and existing businesses and dictate what each party must do, pay or fix for the duration of the lease.
Considering their binding nature, its not surprising that lease disputes are a common occurrence. It is often the case that one (or both) parties receive the disgruntling surprise that their lease imposes an obligation they weren’t aware of or doesn’t afford them the protection they believed they had.
However, fear not, thorough due diligence checks prior to entering a lease can prevent many of these nasty surprises. Due diligence investigations also clarify the obligations of each party, preventing bickering over responsibilities later down the track.
Commercial and retail leasing due diligence checks involve inquiries and investigations into the property and proposed lease document before a binding agreement is entered. In this sense, it is essentially just the case of “doing your homework”.
Before signing a commercial or retail lease, it is recommended that prospective tenants engage an experienced lawyer to undertake thorough due diligence checks. A good leasing lawyer will know exactly what to check and will be able to spot any red flags if or when they present. They will also be able to explain the terms of the lease in plain language and recommend amendments if necessary.
Whilst it is best to engage a skilled professional to undertake due diligence checks, there are several prudent investigations a prospective tenant can also make to ensure they aren’t signing themselves up for trouble. Below, we have outlined four critical due diligence checks prospective tenants should consider before entering a commercial or retail lease.
1# Legal due diligence
When parties enter a lease, they are also agreeing to comply with the applicable laws and regulations. Whilst complying with the law seems obvious, some local laws and restrictions can take parties by surprise, especially if they come from out of town.
For example, liquor licencing and lockout laws place restrictions on pubs, bars and nightclubs. Whilst these laws seem part and parcel to locals, they could very well take a newcomer by surprise.
Additionally, if you’re planning to run a noisy establishment (think pub or bar), it’s important to find out whether there are any noise restrictions in the area as this could have a big impact on the business.
As well as state and federal laws, local council have a range of laws and restrictions for businesses. Some examples include:
- Food inspections
- Outdoor dining
- Footpath cleaning
- Community and charity events
- Environmental regulations
- Waste disposal management
It’s also important to read the proposed lease very carefully and understanding every clause in detail. Tenants should also inquire whether the Retail Leases Act 1994 (NSW) (the Act) applies to the lease and should familiarise themselves with the Act’s provisions. The Act grants extra protections to tenants in circumstances where the premises is considered a “retail shop” as defined by the Act.
2# Commercial due diligence
It is important to scope out potential competition in the area before signing up for anything. For example, it may not a good idea to open a hair salon if there’s already five hair salons in the vicinity.
It is often the case that the landlord owns many (if not all) of the shops in the centre or district. Many prospective tenants may be unaware that, in some circumstances, they may be able to request a non-compete clause be included in their lease to prevent the landlord leasing the premises next door to a competing business.
3# Health and safety due diligence
It cannot be stressed enough just how important it is to undertake health and safety due diligence checks. Failure to properly make these investigations often results in anguish and arguments down the track.
First and foremost, its vital that sufficient fire safety and compliance checks are made. Prospective tenants should identify fire equipment on the premises including but not limited to fire alarms, extinguishers, fire blankets, exit signs and evacuation protocols. Any equipment should be checked to ensure it is in working order, especially if there’s a sprinkler system.
It’s also important to look beyond what’s there. Tenants should be looking for what’s missing, or what could present a fire hazard. Are there adequate fire exits? Are the walls and ceilings fire proofed? Are there any obstacles or locked doors that would prevent evacuation? Are there flammable materials stored on site?
Furthermore, don’t just check the premises, check the lease agreement to find out who is responsible for ensuring the premises is fire compliant. It is important that the fire certificates are requested from the landlord and questions are asked of them about compliance with applicable legislation.
Its also important to check the accessibility of the premises. Is there disabled access? Are there any obstacles or uneven surfaces that could be hazardous or difficult for incapacitated clients and patrons? If there is an upstairs area, are the stairs and/or elevator in good repair and safe to use?
4# Practical due diligence
Finally, it is important to undertake practical due diligence checks. Hot water systems should be inspected. Bathrooms should be checked to ensure they don’t have leaks or clogged pipes. The premises should be checked for obvious cracks and damage.
It is also important to look beyond the premises. Look to see if there are overhanging trees that could cause root damage or hazards. Inspect any adjacent roads, do they present danger for clients or patrons? Is there parking available? Look wider and investigate the local area. Are there high crime rates? If so, you may need to assess whether the security at the premises is sufficient.
Please be advised that this is not an exhaustive list of due diligence checks. It’s merely a sample of the important questions tenants should be asking before they think about putting pen to lease.
If you are unsure of any of the due diligence checks mentioned in this article, the best course of action is to engage a lawyer to assist with assessing the commerciality of the premises.