When signing a lease, people think the amount of rent to be paid.
However with any lease document, the devil is in the detail. And, once signed, leases are devilishly hard to get out of.
A wise tenant should consider and ask the right questions before becoming bound by an agreement.
Wise Question #1: Do you really know how much money you are paying?
Rent is an obvious expense. However most people forget that rent goes up every year. Also there are outgoings (ie expenses tied to the property paid by the landlord and passed on to the tenant).
Forgetting about these two factors can leave you in serious trouble struggling to keep your business afloat in premises you can’t get out of.
It’s not uncommon for the rent in the final year of a lease to be considerably higher than the initial rent. Understand and be comfortable with the method used in the lease to adjust rent.
Check which outgoings the tenant must pay under the lease and the proportion to be paid by you since these costs are usually substantial. A tenant can easily find out about these costs by requesting a disclosure statement from the landlord.
Wise Question #2: How Long do you Want to Be There?
Negotiating the duration of a lease can be a tricky exercise for tenants. Entering into a long term commitment can be very risky since, if the tenant’s business proves not to be sufficiently profitable or if the market value of the property decreases, the tenant may have to choose between being stuck in a bad deal or paying substantial damages to the landlord.
On the other hand, entering into a short term lease can also be devastating for a tenant since tenants are usually required to make high investments in the first years of a lease before making their business profitable. Fit outs alone can cost millions of dollars. Therefore, at the end of the lease term the landlord may require the tenant to pay substantially more rent or, in the worst case scenario, simply require the tenant to vacate the premises.
The best way forward is to make sure you add provisions in the lease agreement granting yourself one or more options to renew the lease for a further period of time.
Wise Question #3: How Can I Get Outta Here?
Say you want to get out of the lease because it just doesn’t suit you any more. You want to pass on the premises to someone else. Landlords will try to make any potential right of the tenant to assign or sublease a lease subject to the landlord’s absolute discretion. The Retail Leases Act prescribes that circumstances that a landlord may rely on to withhold consent to an assignment of the lease. However, the Act only applies to retail leases, not other types.
The Retail Leases Act expressly authorises a landlord to refuse a sublease.
Make sure you give yourself room in the lease to be able to sublease and assign otherwise not much will get you “outta there”!
Wise Question #4: How Do I Leave Nicely?
You’ve got through the lease, business is good and you are ready to move on to the bigger/better/brighter premises. That’s when the “make good” provisions of a lease come into play. These provisions are probably some of the most dangerous provisions in a lease, constantly overlooked by tenants. For instance, you could be in a very short lease yet be expected to undertake structural works, such as replacing floor covering, titles, fire protection equipment and cabling.
Want your wise questions asked and answered? Contact our leasing team: Sydney: Tiago Louzada (02 9188 6490) and Melbourne: Nicole Segal (03 8554 3800) or email us as email@example.com