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
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
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
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
Negotiating the lease
Once you are happy with the premises, negotiate the terms of the
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
Consider whether the rent review provisions are
fair in the current market, including the frequency of any market
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
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
Check your makegood
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
Lease clauses you should consider with extreme
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
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.
Warranties can be risk-shifting mechanisms when the party giving the warranty is not the party at fault for the defect.
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