Are you ready to sign your commercial or retail lease?

Understanding these 10 items will help you avoid unnecessary risk, cost and delays so you can get your business up and running smoothly and securely.

1. Does the permitted use suit your business needs?

The permitted use listed in the lease should be broad enough to accommodate your business long term, even if most Landlords prefer not to give you too much freedom here. How is your sector evolving, and will you want to offer other products or services down the road, that you need to include in the lease now? Supermarkets didn't always have in-store bakeries, flower stalls and sushi bars - where is your industry headed? If you're not sure, a good lawyer can propose creative drafting that helps capture industry developments you don't know about yet.

2. Do you need a planning approval?

Ensure local planning laws allow you to operate your business in that location, not just that the zoning is correct. Each building will have an approved use/uses associated with its address. If your use is not approved, or you are expanding a previously approved premises, you may need to apply for a change of use approval. There could also be conditions on an existing approval at the property (such as trading hours) that you need to be aware of. Landlords will usually require you to take responsibility for any approvals needed to operate your business, including planning. If a planning approval is required for you to operate the business in that location (not just footpath dining), you will need that in place before you can start trading, even if your lease term has already commenced. Contact your local council and speak to a planner to understand the requirements in your area, and contact a lawyer to draft in appropriate conditions so that your lease term commences when you're ready.

3. How are you protecting against competitors and trading challenges?

Competitors might already be nearby and you've assessed their impact on your business success, but what about factors that evolve or competitors that move in during your lease term? Consider negotiating exclusivity for your use, or build in protections in case a major tenant leaves, and foot traffic drops. Your lease term and early exit options (discussed further below) are important here too. Do you have the flexibility to pivot if a newer development with better customer traffic is announced down the road? Does your lease protect your business if your landlord is conducting major renovations that affect the flow of customers past your Premises? A good lawyer can draft these terms for you, if appropriate.

4. Have you calculated the full cost of the Lease?

In addition to rent, most leases will require you to pay an upfront cash bond or bank guarantee as security, outgoings (such as council rates, utilities, cleaning, maintenance, insurance, and other operational expenses involved in running the building / shopping centre your premises is a part of), and the cost of complying with your lease terms (premises maintenance, air-conditioner servicing, pest control). On top of that, you have to work in annual increases to rent over time. These could be fixed increases, CPI increases (inflation) or market reviews. A good lawyer can help you negotiate onerous obligations so you can avoid paying more than you need to.

5. How long is the ideal lease term for your business?

Retail and commercial lease agreements commonly range from 3 - 10 years. Once a lease is signed, it can be very difficult and costly to terminate early. If you are a new business, consider whether a short term lease, followed by the option to renew for a longer period is better for you. This gives you the opportunity to establish the business before making a bigger financial commitment. You should carefully consider how long you are willing to commit, and if you are relying on an option to renew to extend your stay, make sure you have all the information you need to decide to stay before the renewal notice is due.

6. Understand Personal Guarantees and Security Requirements

Even if you are leasing through a company, landlords typically require additional security such as a personal guarantee (even in addition to a bank guarantee). A personal guarantee means you may be personally responsible for the lease if your business cannot meet its obligations. This can put your personal assets at risk, so it is important to fully understand what personal obligations you are committing to. A lawyer can advise you on the terms of a personal guarantee, also known as a director's guarantee.

7. Clarify Responsibility for Repairs and Maintenance

One of the most common disputes arising from commercial leases is maintenance responsibility. The lease should clearly outline who is responsible for repairs to items such as air conditioning systems, plumbing, electrical work, structural elements and fire safety equipment. If these responsibilities are not clearly defined, you may find yourself paying for costly repairs that you did not expect or in a dispute with your landlord.

8. Be Aware of Make Good Obligations

Make good obligations refer to what you must do to restore the property at the end of the lease. This can include removing fitout works, repainting, replacing any broken flooring, window coverings, light bulbs, and otherwise returning the premises to its original condition. These requirements can be expensive, especially if extensive work is required and your landlord requires you to carry out the works after hours (e.g. if in a shopping centre and daytime works would disturb trade). Understanding these obligations before signing will help you factor in the full cost of the lease to you budgets and forecasting.

9. Ensure There Are Exit or Transfer Options

Business circumstances can change, so it is important to understand your options if you need to exit a lease early, or if you are restructuring and this triggers an assignment of your lease. Depending on your business type and future plans, it may be worthwhile drafting in special provisions relating to assignment and subleasing so that you have some confidence that if particular criteria are met, your landlord will be obliged to approve of the proposed arrangement. A lawyer can determine if negotiating these types of terms will be worthwhile for your business and draft contract variations for you.

10. Find Good Advice

The terms you negotiate on your lease now will impact your business for years to come. Take the time to carefully review all the terms and understand your obligations and risks, and find advisors you can trust. If you're not sure what risks might be hiding in your lease terms, or you require variations drafted, talk to us about negotiating key conditions that can reduce the cost of your lease, set your business up for growth, and help you avoid the stress of common disputes.