Eight points to consider when entering into a commercial lease

In brief - Do your due diligence carefully before entering into a commercial lease

Entering into a lease is a significant commitment for a commercial tenant, as fit out costs and other expenses can be substantial. You should consider all aspects of the lease carefully to avoid adverse effects on your business. Here are eight points to keep in mind.

Planning permit

Check whether the intended use of the premises is permitted under the relevant zoning and if so, whether a planning permit is required. The zoning may impose restrictions on how the premises may be used. If you enter into a lease where the use is prohibited under the zoning, the council may issue a planning contravention notice to make you stop using the premises.

It can be extremely costly to vacate premises, particularly if you have spent a lot on the fit out. It may be difficult to find suitable alternative premises at short notice. Depending on the terms of the lease, the landlord could also issue proceedings for breach of lease.

Term of the lease

Negotiate a long lease (initial term plus options for further terms). A long lease gives you security of tenure and the opportunity to develop your business and recoup your investment. It also increases the value of the business, making it easier to sell.

It is risky to rely on the landlord to grant a new lease at the end of a short lease. The landlord may have other plans for the premises, including developing the land or occupying the premises itself.

The landlord could also decide to charge exorbitant rent under a new lease if it is aware that you have invested heavily in the fit out and that relocating the business would be costly or difficult. If you have concerns about the success of the business or the suitability of the premises, negotiate a short initial term with options for further terms which you can choose not to exercise.

Mortgagee's consent

If the property is mortgaged, obtain the mortgagee's consent to occupy the premises from the landlord. While the lease may be binding between you and the landlord, it does not bind the mortgagee unless its consent is obtained. This can be disastrous if the mortgagee takes possession of the premises as a result of the landlord's default, because the mortgagee can terminate the lease.

Multiple occupancy building

If the premises only form part of the lettable area of the building, ensure that an up to date plan is attached to the lease. The plan should correctly describe the lettable area of the premises, any allocated car parking and shared or common areas such as toilets, kitchen, car parks, entry to and exit from the premises. This can help avoid disputes about which areas you have exclusive use of or shared access.

Condition report

Obtain a condition report from the landlord, recording the condition of the premises at the start of the lease. The contents of the report should be agreed. Photographs of the premises should be retained by each party. The condition report helps to avoid future disputes about damage, replacement, repair and maintenance of the premises, landlord's fixtures and fittings and your make good obligations under the lease.

Retail Leases Act

Determine whether the Retail Leases Act 2003 (Vic) or similar legislation enacted in other states applies to the lease. This is not always obvious. (For a list of links to the relevant legislation in the different states, please see the end of this article.)

If the Act does apply it provides you with statutory benefits which the landlord cannot exclude and which you may not otherwise be able to negotiate. For example, in some Australian jurisdictions a landlord cannot pass its land tax liability to you, or legal costs for the preparation of the lease.

Early termination clauses and other interferences with the tenancy

Resist clauses that allow the landlord to terminate the lease before the end of the term. The landlord may intend to redevelop the site, forcing you to close or relocate the business.

A refurbishment clause can also hurt your business. An extensive refurbishment of the building may inhibit your access and the flow of customers to the premises. Noise and dust from works to the building may also discourage customers.

A clause that forces you to relocate can be expensive and your business can end up in a diminished traffic zone for the same rent. Even if you are compensated, such disruptions may cause irreversible damage to your business.

Due diligence and professional advice

To guard against costly mistakes, avoid making decisions about a lease in haste or under pressure. Carry out proper due diligence and seek advice from an experienced solicitor to ensure that all aspects of the lease are properly considered.