Checklist for entering into a commercial lease
Prior to entering into a commercial lease, there are a several of points for consideration. Ensuring that you have considered the items on this checklist are part of basic risk management. Namely:
- are premises are suitable for the proposed permitted use;
- are local laws and council regulations allow for the permitted use; and
- do you understand the terms of your lease and have a lease management strategy in place.
By entering into a commercial lease you are making an extraordinary financial commitment. Prior to making such a commitment it is essential that you engage tenant representation services or a property lawyer to review and advise you on the lease terms. Whilst not a substitute for professional advice, this article is designed to give you a basic understanding of some of the critical points that your tenant representative will consider when conducting its review.
What is the Permitted Use of the Premises?
Before entering into a commercial lease, you must ensure that you are lawfully allowed to carry on your business from the premises. It is the Tenant’s responsibility to conduct this due diligence, not the Landlords. Refer to our article ‘A critical question: Is your premises fit for purpose?’ for further information.
If your proposed permitted use is not currently approved by council, then you may need to request approval. In these circumstances, you should ensure that obtaining approval is a pre-condition to the lease commencing. This will ensure that you are not bound to lease that you cannot lawfully operate your business from. If council reject the request, the lease simply never begins. If you are not sure how to carry out this due diligence, speak to your tenant representative Brisbane. They will also provide lease negotiation services and can negotiate the appropriate lease special conditions to minimise your risk in this area.
What Costs are Payable?
A commercial lease will set out the costs payable during the term. In contrast to retail leases, there is no legislative protection regarding the type of costs that Landlord’s can recover from commercial Tenants. For example, the recovery of the Landlord’s land tax. Be aware that details of these costs are often spread throughout the lease document. Accordingly, you must ensure that the document is reviewed in full, and comprehensivley.
In addition, and again in contrast to retail leases, the Landlord is not required to provide a disclosure statement with a breakdown of outgoings. The lease will usually specify the categories of outgoings that the Landlord is intending to recover. However, you should request a breakdown estimate for the upcoming financial year to determine the likely annual amount payable under the lease.
Any Commercial Lease Incentives?
A commercial lease incentive is often used to entice Tenants to enter into the lease. The most usual incentives on offer are structured as a:
- rent-free period;
- rent reduction; or
- fit-out contribution.
You can visit our ‘Lease Incentive‘ article for a further explanation on Landlord incentive or rent reduction types.
Each commercial lease incentive structure comes with pros and cons. For example, if the Landlord is contributing to your fitout then it’s likely they will also want to own that part of the fitout. Though, you will still be required to fund any maintenance or repair. You will also likely be required to remove and dispose of the Fitout at the end of the lease, which can be costly.
If you are provided with a rent reduction then keep in mind that the annual rent review will be calculated based on the full face rent, rather than the reduced rent.
Regardless of the structure, a Landlord will usually require the commercial lease incentives to be documented by way of an incentive deed. An incentive deed will also contain a clawback clause. A clawback clause requires Tenants to repay a portion of the incentive value if you do something like assign your lease or default.
The enforceability of clawbacks is questionable, but nonetheless major Landlords may seek to enforce them because they have deep pockets and top-tier lawyers. It’s wise to negotiate restrictions on when a Landlord can clawback on a commercial lease incentive during the very early deal negotiation phase. More specifically, make sure it is in your heads of agreement– it’s going to save us all a lot of money and a lot of heartache if you do.
Finally, always be mindful that each commercial lease incentive structure carries different tax implications. Be sure to seek advice from your accountant.
Has the Landlord requested a personal guarantee?
Depending on the size of your company, you may be required to provide a personal guarantee for the Tenant entity. In essence, as a personal guarantor you are personally guaranteeing the obligations of the company under the lease. For example, if the company defaults on payment of rent then the Landlord can demand payment from you personally. If you fail to provide payment, the Landlord can bring an action against you. The risk associated with providing a personal guarantee will also depend on how you hold your personal assets. For example, there may be less risk if they are subject to asset protection such as being held in trusts. You should always consult with your accountant prior to agreeing to provide a personal guarantee.
There are alternative security options that you can negotiate with a Landlord, such as:
- increased bank guarantee amount; or
- cap your personal liability under the personal guarantee; or
- if there are multiple directors, agreeing to a liability percentage for each personal guarantee.
Prior to entering into a commercial lease, you should:
- determine whether the permitted use is lawful or whether you require council consent;
- consider any commercial lease incentive offered by the Landlord;
- ensure you are aware of all costs payable under the lease; and
- the risk associated with providing a personal guarantee.
If you have any questions or are interested in tenant representation services contact the Liberty Leasing consultants on (07) 3359 8273. Otherwise you can book an appointment online and our tenant representative will give you a call at a time convenient to you.