Australia: When your business doesn't fit in the garage any more - what to consider before entering into a lease

Last Updated: 9 May 2016
Article by Audra Oliveira-Ben

In brief - Do your homework before you sign a lease

Read and understand the wording of the lease, check the condition of the premises carefully, compare market rates, get legal advice and ensure there are no draconian clauses in the lease you are about to sign.

You can't back out of a commercial lease at your convenience

Running your business out of your garage or spare bedroom may seem like the optimal solution for a new start-up. If Steve Jobs did it, so can you, right? However, when, among other things, you can no longer decipher where your home ends and business begins, you may need to start considering alternative, commercial premises from which to carry on your business.

Entering into a lease should not be undertaken without serious consideration. You will be bound contractually for the whole of the lease term and unless negotiated, will not be able to terminate the lease early at your convenience, although you may be able to assign the lease subject to conditions.

Prior to entering into a lease you should carefully consider the following:

You can only rely on the wording of the lease

Do not rely on any representation made by an agent of the landlord, including representations about the area of the premises, even if it is stated in an advertisement or other marketing material. Most leases will contain a clause stating that you (as tenant) did not rely on any representation except as set out in the lease. Unless it is documented in the lease, you will not be entitled to claim later: "But the agent told me..."

Are the plant, equipment and facilities in the premises in good working order?

Verify the condition of the landlord's plant, equipment and facilities. Check that everything is in good working order prior to accepting handover of the premises. Usually tenants will have no claim against a landlord where there is a breakdown of services (subject to the landlord's obligation to use reasonable endeavours to ensure those services are in working order).

Compare the rental rate per square metre

Consider the rate per square metre of rent requested under the lease. Assess this against similar buildings for similar uses in the vicinity.

Negotiating the lease

Once you are happy with the premises, negotiate the terms of the lease.

If it is a commercial lease, request each party pay its own legal costs (don't just accept that you are required to pay the landlord's costs).

If you are carrying out a fitout, request a contribution from the landlord towards that fitout. The landlord will benefit from your fitout, so ask away! Other incentives may include a rent free period or lump sum payment or a combination of incentives.

Consider whether the rent review provisions are fair in the current market, including the frequency of any market rent review.

Negotiate the length of the lease term and any options. Are you able to commit to the initial term? Do you have sufficient flexibility to grow your business?

If you are a company, consider whether you are able to provide personal guarantees by the directors to guarantee the obligations of the tenant. If not, request alternative forms of security, such as a larger bank guarantee or security deposit.

Check your redecoration obligations. You should not have to put the premises into any better condition than the condition prior to your first occupation, subject to fair wear and tear.

Check your make good obligations at the end of the lease. Such obligations can vary from simply removing your property to bringing the premises back to a base building state.

Ensure any special condition you require is contained in the lease. Even if agreed verbally by a landlord, if it is not documented, the landlord has no obligation to effect it.

Lease clauses you should consider with extreme care<

Be extremely wary of any of the below clauses in a lease and seek further advice:

  • Landlord's right to relocate and/or demolish the premises
  • Termination of the lease due to resumption of premises
  • Any indemnity provided to the landlord
  • Unreasonable insurance obligations

If the landlord won't delete these clauses, request a limit to their scope. For example, insist that a relocation or demolition may only apply after X years.

Make sure you diligently note relevant dates in the lease. Any option period must usually be exercised in a particular form before a set date, or you will lose your right of renewal.

Do your due diligence and make sure the lease is fair

You will know when it's time for your business to move out of the garage or spare bedroom into a home of its own. But before you sign a lease, do your due diligence. Get legal advice and ensure that the lease is reasonably balanced between the competing rights and obligations of yourself and the landlord.

Audra Oliveira-Ben
Property
Colin Biggers & Paisley

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Audra Oliveira-Ben
 
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