Most businesses need some sort of premises to run from. Whether you are in a trade or construction based business, professional services, or selling goods to consumers at some point in your business’ lifecycle you will probably need a factory, commercial office space, or retail shop to trade from.
For most people, their first entry into establishing a business premises is to enter into a lease and rent one.
As the business evolves, tenants often turn into landlords and buy their own premises however, even if that is your end goal, it is important that you take seriously understanding your rights and obligations if you are entering into a lease to run your business from.
Here is a list of important things to think about from the beginning:
• You will usually be asked to sign a heads of agreement or lease proposal that contains the commercial terms you agree to with the landlord before a formal lease is prepared. Make sure you read this carefully and agree to those terms. It is uncommon for a landlord to agree to any changes from the terms that are set out in the heads of agreement or lease proposal so if you want to negotiate anything in particular you should try to do it at the start and make sure it is recorded in the heads of agreement or lease proposal.
• Get an estimate of what costs you are going to have to pay in addition to your rent. For example, most leases require that the tenant makes a contribution to outgoings (things like Council rates, water rates, insurance costs, strata levies and more). Some leases require the tenant to pay a percentage share of the outgoing, where other leases require a tenant to pay 100 per cent or nil. Either way, it is important that you think about more than just your rent.
• It is important for you to understand who is responsible for maintenance, service, and repair. Typically speaking, a tenant is ordinarily responsible for general maintenance and upkeep and fixing any damage that they cause whereas a landlord is responsible for repairs or replacement of a capital nature. For example, often a tenant will be required to service an air conditioning system at their own regularly however if replacement or significant repair is required this will be the responsibility of the landlord. Each lease differs however, so you need to check. Common items that tenants will be responsible for maintaining and/or servicing include air conditioning, roller doors and shutters, grease traps, and fire safety including yearly certification.
• Be prepared to pay some upfront rent (usually a month in advance) and provide a security bond (usually three or six months rent), or a bank guarantee that is equal to three or six months rent. If you are providing a bank guarantee instead of a cash bond, you will need to make an application to your bank and the process can take one to two weeks so you should get to work early in the process so you are not delayed waiting for the bank to issue your bank guarantee.
• You will be required to provide evidence of your insurance for public liability and any other insurance (for example plate glass) at the commencement of the lease. If you engage with an insurance broker you can usually arrange an insurance policy that complies with the requirements of the lease fairly quickly but again you should start this conversation early.
• Makegood – what state do you need to leave the premises in at the end of the lease? Tenants often overlook this. Often, they are too focused on getting into the premises and commencing trade. It is common at the end of a lease a tenant will be required to remove its fitout (for example partitions, joinery, cabinetry and other installations) and repair any damaged caused as a result of removal. There is often also a redecoration clause requiring painting and/or the restoration of services like floors and walls or a “bare shell” requirement which requires a tenant to de-fit the premises, remove fixed floor coverings and installations, and give the premises back as a bare shell (blank canvas) ready for the next tenant to fitout. Makegood and redecoration requirements are often expensive and you need to budget for them.
The above is not an exhaustive list of the only things you need to think about if you are considering renting a business premises. There are other more obvious things like amount of rent, how often it is paid, when it increases and by how much, how long your lease is for and whether you can extend it and a range of other considerations.
We work with tenants and landlords everyday to assist them in navigating the relationship of landlord and tenant.
