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The important business of getting the lease right

The important business of getting the lease right

A badly drafted lease can be the downfall of a business, and cause the tenant or landlord disastrous consequences. Negotiating a lease can be a difficult process, particularly for those renting a commercial space for the first time. The Victorian Small Business Commissioner last year alone received over 1000 applications regarding retail-leasing disputes.

One of the threshold questions is whether the lease is covered by the Retail Leases Act 2003. The Act applies to the lease of premises that are to be used for a retail purpose. The Landlord is required to provide the proposed tenant with particular documents: a copy of the lease; a disclosure statement and a Small Business Commissioner Information Brochure. The act also provides additional protections for tenants and the provisions override the terms of the lease

The foundation to a successful tenant/landlord relationship whether is covered by the Retail Leases Act 2003 or not, is the lease agreement. Some key issues to consider are set out below:

Security Deposit or Bond and Guarantees

  • Legislation does not require a tenant to pay a security deposit, however it is common practice for the landlord to request an amount, generally the equivalent to a month or two months rent. It is highly recommended that tenants negotiate the amount with their perspective landlord.
  • Landlords will often ask for personal guarantees from the directors of the tenant, where possible these should be avoided. Often the compromise is the provision of a Bank Guarantee by the tenant.

Rent and Outgoings

  • Although simple in theory, determining the practical elements is crucial to a smooth lease period. Setting out how the rent is to be paid, and at what intervals (quarterly, monthly or weekly) is crucial for both parties, as this can have an impact on the liabilities and deductibility of tax, but also decreases the risk of disputes arising regarding payment of rent.
  • The contract should also be clear about the additional costs of the commercial premises. Rates, taxes, insurance and other outgoings for the building and land must be considered when negotiating the lease, clearly stating who is responsible for each element.
  • The parameters of a rent review should also be laid out from the beginning. There are common methods for determining how the rent should increase (business turnover or profit, Consumer Price Index or a flat percentage), but it is essential for both parties to negotiate which one suits their needs best.
  • Maintenance obligations are often shared between a landlord and the tenant within most commercial leases. However where no obligation is listed neither the tenant nor the landlord is required to act – which practically becomes the tenant’s problem. You should agree in advance who is responsible for any maintenance, especially plant such as air-conditioning, elevators and fire protection systems.

Termination

  • Early termination may be prohibited under the lease or can be extremely costly for tenants. A shorter lease with options to renew provides greater flexibility.

If you are considering leasing a business premises we recommend you contact Bayston Group to review your position and ensure that your risks are covered.