It can be an overwhelming process for a new or existing business owner when considering the lease of commercial property. It is therefore important that you know what to look for when inspecting the premises to achieve the best outcome for your business.
Before signing a lease for a commercial property, it is important that you consider some essential questions, including:
- What are the costs involved with the lease?
- What is the length of the commercial lease?
- What is the physical condition of the property
- Are there any regulations that may influence the function of the property (such as noise restrictions or fire safety concerns)?
It is also important when considering commercial leasing that you comply with the relevant laws and regulations. Understanding these are essential when working out what to ask your agent or landlord and can give you the required information to successfully assess the property.
Costs Involved
A significant factor when considering entering into a commercial property lease is the amount and frequency of the rental payments required, as well as the requirement of any upfront costs. It should be noted that commercial lease rents can increase over time and as such, this should be taken into account when looking at the initial costs involved with the proposed lease.
Outgoings should also be considered, being the expenses incurred by the lessor in the maintenance and operation of the property. They can include council rates, water rates, land tax, repairs and maintenance, property management fees and building insurance. In most circumstances the tenant is responsible for the payment of most commercial property outgoings on top of the regular rental payments.
Rent reviews for commercial leasing are usually conducted annually by a fixed percentage or CPI. Then at the end of each lease the rent is usually reviewed to market levels.
Typically, in all commercial leases, a compulsory security deposit is required to cover rental arrears or should there be any damage caused by the tenant during their occupation of the premises. The amount of the bond is decided between the tenant and the landlord and can be paid as a cash deposit or a bank guarantee.
Length of the Commercial Property Lease
The duration of the lease is another significant factor when deciding whether to enter into a lease. The agreed timeframe of the lease will mean that you are legally bound to the requirements of the lease for that amount of time. You should also be aware if the terms of the lease include an option to renew towards the end of the lease’s duration for a further term. This is a benefit for the lessee, which can be exercised at their discretion provided they are not in default under the Lease.
Physical Condition of the Property
It is important that you assess the property before entering into a lease to determine whether it will suit your business’ needs and whether the condition of the property reflects the proposed cost of leasing it.
Accessibility
For example, you may need to consider the accessibility of the property and whether it is wheelchair accessible. This may include whether the building has an elevator or ramps for clients/customers and staff to access easily on day-to-day basis.
Ventilation
Another important example is ventilation, especially if you are planning on using the premises for hospitality purposes. The food health and safety regulations require that the supply and exhaust systems within the property meet the minimum requirements for air exchange. This ensures that fresh air is provided, keeping the food and beverages to be served in a safe environment. If you don’t check the ventilation, you may face issues with non-compliance and face penalties, therefore it is important to undertake due diligence in order to avoid further costs.
Hazardous materials
Additionally, the potential of any hazardous materials is also a significant factor to note when examining the property’s physical condition. Hazardous materials contained within the property may cause future harm to clients/customers and staff and therefore, can pose a serious risk when leasing a property. If any hazardous material is found (such as asbestos in older buildings) you should also ensure that the removal of these materials has been discussed with the landlord and factored into your decision of entering into the lease, as the removal may be costly.
Noise Restrictions
If your business produces high levels of noise when operating, it is a good idea to determine whether there are any applicable regulations or strata by-laws that may restrict the level of noise. For example, loud music or large crowds could pose an issue when leasing a commercial property in certain areas. Therefore, you should always confirm what restrictions are in place before entering into the lease.
Fire Safety
Before entering into a commercial lease, you should also ensure that the property contains suitable fire equipment and whether this equipment meets the standards of the relevant legislation. This includes obtaining copies of any reports or certificates that assert that the equipment is of legal standard for fire equipment. The landlord should provide a copy of the Annual Fire Safety Statement.
The premises itself should also meet all fire safety requirements and if not, you should understand what additional work is required to ensure they meet legal standards and confirm if this will be completed by the landlord.
Ultimately, once you enter the lease, you may also have responsibility for ensuring and maintaining that the property upholds fire safety standards depending on what is negotiated in the Lease.
Whether the Premise is licensed to be used for its Intended Purpose
Without proper licensing, operating a business outside of what the Council has approved can cause substantial issues to your occupation of the leased premises. You should ensure that the property is approved to operate your type of business. This is something you should pay early and essential consideration towards before proceeding any further with the lease, and discuss with Council to ensure the property is approved for your proposed use.
Other business-related considerations
There are also other business-related factors that should be considered when entering into a commercial property lease, such as how the location of the property will impact upon business. This includes if the property being leased is in a busy area or has a lot of foot traffic, and if there are any businesses close by that are similar in nature.
‘Make good’ provisions – concluding a lease agreement
Potential tenants should be aware of any ‘make good’ provisions within the lease agreement, with these types of provisions requiring that the premises is returned to a similar condition as to when the lease first began. This can involve repainting the building to its original condition, or redecorating the premises as to what it was beforehand.
Tenants will usually be required to fulfill this standard before the end of the lease and therefore, must ensure that they have a sufficient amount of time to carry out these requirements before the duration of the lease comes to a close otherwise, they may be liable to pay further costs for the landlord to rectify these issues. The landlord may deduct such costs from the lessee’s security deposit or bank guarantee.
How Burgess Thomson can Help
It is important that you know exactly what to look for when considering leasing a commercial property to maximise its benefit to you. There are many things to consider when looking at leasing commercial property and so a steady legal hand to guide you through the journey must be a key priority.
The team at Burgess Thomson has substantial expertise in Business, Commercial and Property Law. With over 60 years’ combined experience, our solicitors have successfully assisted many clients in Commercial and Retail Leases from start to finish. We are known for sound advice and our ability to comprehensively answer any questions in our area with utmost diligence.
Experienced solicitors who have a keen eye for detail are becoming more sought after so if you wish to discuss your matter with our team, please do not hesitate to call our office on (02) 4929 5602 to arrange an appointment.