4 things you need to know before signing up to a commercial lease
Entering into a lease of commercial premises is a significant financial and legal commitment. Aside from finding a rental premises that meets the needs of your business (e.g. location, size and fit-out of premises), you will also need to enter into a lease agreement with the landlord.
Before you sign a lease agreement, it is very important that you review the terms of the agreement and ensure that you understand your obligations and liabilities. The lease may contain onerous terms that are not immediately apparent. Taking the time to carefully read through the lease and taking the opportunity to obtain legal and financial advice can avoid headaches later on. You may also be able to negotiate more favourable lease terms with the landlord, particularly in the current rental market where there is an oversupply of commercial and retail premises in most locations.
Here are some key things that you should consider before signing a commercial lease.
Is the lease a retail lease?
In Western Australia, the Commercial Tenancy (Retails Shops) Agreements Act 1985 (WA) (Retail Shops Act) applies to retail shop leases. If you will run a retail business from the leased premises or if the lease is of a premises within a retail shopping centre, it is more than likely that the Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA) (Retail Shops Act) applies to your lease.
In general, the Retail Shops Act applies to the leases of premises with a lettable area of 1,000 square metres or less that are:
- situated in a retail shopping centre wholly or predominantly used for the carrying on of a business; or
- not situated in a retail shopping centre that are wholly or predominantly for the carrying on of a retail business; or
- used for conducting a “specified business” which includes dry cleaning, hairdressing, beauty therapy, shoe repair and video.
If your lease is a retail shop lease, the Retail Shops Act will provide you with certain legislative protections which are not afforded to non-retail leases (i.e. general commercial leases). For example:
- retail shop tenants are generally entitled to minimum lease period of up to five years;
- landlords are prohibited from passing on some of their legal costs in relation to the lease to the tenant (e.g. lease preparation costs);
- the landlord cannot unreasonably withhold its consent to an assignment of the lease.
What key clauses should I look for?
Whether the lease is a retail shop lease or a commercial lease, here are the key clauses that you should look for:
- Term – the length of the lease and any options to renew the lease.
- Rent – the amount that you are required to pay the landlord, usually on a monthly basis.
- Use – the lease will specify the permitted use of the premises (e.g. restaurant, café, consulting rooms, hardware store).
- Outgoings – the landlord may require you pay or contribute towards operating expenses of the leases premises or building where the premises is located in addition to the rent.
- Tenant obligations – these clauses will vary in every lease, but will normally include obligations to maintain the premises in good condition and repair any non-structural damage, obtaining and maintaining any licences needed by the tenant (e.g. liquor licences), and making good the premises when the lease ends.
- Termination – the grounds on which you or the landlord can terminate the lease.
- Default – the landlord will be able to terminate the lease if you have breached an essential term of the lease, such as failing to pay rent or using the premises for purposes that are not permitted.
What costs will I be liable for?
In addition to reviewing the annual rent amount and operating costs that you will be liable for as a tenant, you should also check what other costs you will be liable for. A landlord will normally require that a tenant provides either a bank guarantee or a security deposit (usually the equivalent of three month’s rent and operating costs) plus the first month’s rent in advance.
The lease will normally also specify who is responsible for the costs of preparation and registration of the lease. If the lease is a retail shop lease, the landlord is not able to claim costs from the tenant for the negotiation, preparation or execution of the lease or any renewal or extension of it.
What happens if there is a dispute?
Most leases will outline a process that the parties must follow in the event of a dispute. This may include the parties taking part in a dispute resolution process, such as a mediation or arbitration.
If the lease is a retail shop lease, the Small Business Development Corporation may assist in resolving the matter. The State Administrative Tribunal otherwise has jurisdiction to in relation to disputes under the Retail Shops Act.
If you are a tenant entering into a commercial lease remember to take the time to review the key terms of the lease, including whether the lease is a retail shops lease, and determine the total costs that you will be up for. Take the opportunity to also obtain legal and financial advice so that you understand your obligations and liabilities under the lease. Understanding the terms of your lease and getting appropriate advice will give you peace of mind to focus on running your business.