Finding the right premises for your business can be a stressful process. However, once you have found the perfect premises, there are still numerous matters to think about. This article will explore what you need to consider as a tenant before entering into a commercial lease, including:

• whether the premises are suitable for your business;
• the costs of entering into the lease; and
• key clauses to include in the lease.

1. Are the Premises Suitable for Your Business?

One important consideration is whether the premises are suitable for the business that you intend to carry out. Depending on the type of business you run, you may need to obtain the local council’s consent for your permitted use under the lease. Therefore, before entering into a commercial lease, you should ensure that you check with the council whether you are permitted to use the premises for your intended purpose. Additionally, suppose your business is not zoned for the premises. In that case, you might be able to lodge a development approval with the council to approve your proposed use of the premises.

Additionally, consider any fitout works that you will need to undertake. You will need your landlords permission for any fitout works, but you may also need approval from the council for any development. You will often need to show evidence of this permission to your landlord.

Note, it is vital that you do not enter into the lease, or commence any fitout works, unless: you already have council approval; or the lease specifies that it is conditional upon receiving development approval.

If you fail to specify this condition and enter into the lease, you may still be locked into your lease for the duration of the lease term, and have to continue paying rent, regardless of the fact that you cannot operate your business from the premises.

Permitted Use Clause

Additionally, your lease will include a permitted use clause. A permitted use clause outlines the type of business you can operate from the premises.

If your lease does include a permitted use clause, you should ensure it accurately and completely describes how you intend to use the site.

Additionally, consider whether the permitted use clause is sufficiently flexible and broad, and does not restrict you to just one use. This will make it easier to find a new tenant if you decide to assign your lease or sell your business in the future.

2. What Are the Costs?

Another important consideration before entering into a commercial lease is the costs of the lease. This includes factoring in the payment of:

• rent and deposits;
• securities; and
• outgoings.

Rent

When you enter into a commercial lease, you commit yourself financially to paying rent for the entire lease term. Depending on what the lease stipulates, you may be required to pay weekly, monthly or fortnightly, although most common is monthly in advance. Therefore, you must ensure that your business has sufficient money to meet your rental obligations.

You may need to pay a holding deposit on a lease, which will be paid towards your rent once it commences.

If you need to fit-out the premises, you should see whether you can negotiate a rent-free period during this time. Doing so will help alleviate the pressure of paying rent before the business is operating from the premises.

It is also important to factor in the impact of yearly rental reviews, which may result in an increase in rent. The lease should outline the method of rent review to use and how often they will occur.

Common rent review methods include:

• conducting a market rent review based on the current market rental value;
• using the Consumer Price Index (CPI) or inflation rate to adjust the rent, assessed based on rental value fluctuations in a specific geographical area; and
• increasing the rent by a fixed amount or percentage increase each year for the term of the lease.

Security Deposits

Generally, before a tenant can access the property, they must pay the landlord a security deposit. The landlord holds the security deposit as security in case the tenant:

• defaults on the lease;
• damages the property; or
• otherwise breaches the lease.

You can pay your security deposit as upfront cash. You may also use a bank guarantee. A bank guarantee is an undertaking from a bank or credit union to guarantee payment of the amount to the landlord. The landlord has the right to cash in the bank guarantee without your notice or consent if you breach the lease terms or damage the property.

Outgoings

There may also be other costs involved with the lease, such as outgoings. Outgoings are the expenses the landlord incurs for the operation,maintenance and repair of the entire building or centre within which the premises is located, and includes things like security costs, gardening, maintenance of common areas and provision of shared facilities. Usually, these costs are paid by the landlord and then recovered from the tenants of the building (proportionate to the area of their premises) as outgoings contributions.

Outgoings are separate to service charges, such as electricity, water, internet, which are usually separately and directly billed to the tenant. You should request a breakdown of any possible outgoings you must pay in addition to the rent before entering into the lease.

3. Key Clauses in the Lease to Consider

Before you enter into a commercial lease, it is important that you understand the meaning of the key clauses in a lease. The table below outlines some

clauses you should look out for.

Lease Clause:

Lease term – The length of the lease term, options to renew and holding over provisions.

Rent review – The method of rent review. Generally, a market review, CPI increase or fixed amount/percentage increase. It may also be a combination of these methods. Market rent reviews typically occur before the start of an option term.

Outgoings – These are the landlord’s operating and maintenance expenses for the whole building, paid in addition to rent. The obligations you must meet as a tenant. These vary depending on the lease but may include:

• maintenance and repairs;
• cleaning the premises;

Tenant obligations – how you must, and must not, use the premises insurance obligations; and making good the premises. ‘Making good’ involves the tenant returning the premises to its original state at the end of the lease.

Demolition/Relocation – The landlord may have the right to terminate the lease early if they wish to demolish the premises or relocate you. These provisions will have a material impact on your lease.

Assignment / Subletting – provisions will have a material impact on your lease. Whether the tenant can assign or sublet the lease to another party. This clause will also outline the circumstances and conditions for which assignment or subletting may occur, such as requiring the landlord’s consent.

Default – failing to pay rent; using the premises for purposes that are not permitted; or failing to comply with repair and maintenance obligations.

It is a good idea to have a lawyer review your lease and negotiate terms that are in your best interest.

Key Takeaways

Entering into a commercial lease is a big decision for any business. Firstly, it is important to ensure that you have carefully considered whether the premises are suitable for your business. Additionally, you should be aware of the costs involved and confident that you can meet your rental and other financial obligations. Finally, there are many clauses in a lease you should look out for. Engaging a lawyer to review your lease can help to ensure that you are aware of your rights and can meet your obligations under the lease.