Commercial Leasing Negotiations

If you are a business owner, regardless of the type or size of your business, when it comes to leasing premises both commercial and retail, it is always best to seek the advice of an experienced lawyer before signing on the dotted line!

My name is Brent Jones and I head up the commercial and property law practice here at Lamrocks. 

Typically, a lease is drafted by the Landlord's lawyer and is often structured in favour of the landlord.  If you review the terms of the lease carefully, and negotiate where necessary, you can ensure that the agreement also accommodates your needs and offers more protection for your business moving forward.  

So What Can You Negotiate?

When entering into a lease there are a number of factors that you should consider before you sign. Every agreement is different, and landlords are more likely to negotiate certain terms than others.  An experienced lawyer can not only identify the terms that you should try to negotiate before signing, they can assist you at each stage of the leasing process. 

Some of the issues you need to consider before signing the lease include:

1. Before Signing the Lease

• Length of the lease

Some landlords may offer a long-term lease in an attempt to financially secure their rental return, whilst other landlords may offer a short term lease depending on their future intention with the Premises  In any event, you must always consider what suits your business and attempt to negotiate a term that aligns with your business objectives.

• The Rent

Most landlords calculate the rent to be paid based on a per square-metre basis that covers the building and maintenance costs, tax and other outgoings.  While many landlords are not willing to negotiate on the rental amount, you may be able to negotiate on the type of rent review and how it can be applied.

• Incentives

Some landlords may be willing to consider “incentives” rather than a reduction in rent, which can include rent-free periods at the beginning or end of your lease, or contributions to other costs such as a fit-out or improvements to the Premises. A commercial property lawyer can advise and structure a particular incentive that may work in your favour.

• Approvals

It is usually in your interest to negotiate the landlord’s approval for a broad “permitted use” for the premises before signing your lease.  This will allow for future diversification of your business or open the door to sub-leasing in the future.  If the lease is very limiting in terms of use, it may be costly and time consuming to try and vary or amend the conditions after it has been signed. 

Depending on the property and the nature of your business, you may also need to obtain Council approvals before operating your business from that location.  In some cases, you may want to undertake work on the property and fit it out to suit your needs.  A lawyer will be able to liaise with Council and other bodies to ensure you have the necessary approvals before work commences.

• Security Deposits and bank guarantees

A landlord usually requires a security deposit or bank guarantee as security against default by a tenant under a lease. The circumstances in which a landlord can draw on this security are outlined in the lease and an experienced commercial lawyer may be able to negotiate these terms more favourably for you.

• Option to renew

Before signing the lease, you may wish to negotiate an option to renew.  This gives you the right to obtain an additional term for the lease on the same terms.  For example, if the initial lease period is three years, it may have an option to renew for an additional three years that effectively increases the lease period to six years.  Without an option to renew, there is no guarantee that you will be allowed to continue in the lease beyond your initial term.

Some of the issues you need to consider during the lease include:

2. During Your Lease

• Outgoings

If the landlord is charging for outgoings under the lease (or operating costs), it is important that you understand exactly what you will be paying for and how much it will cost.  You may be able to negotiate a fixed-fee or capped amount before signing the lease.

• Repairs, alterations and improvements

You must be clear on which party is responsible for organising and paying for repairs during the lease (other than ongoing cleaning and maintenance), and you may want to negotiate a clause that also allows you to make alterations and improvements to the property. 

If the lease requires you to refurbish the Premises throughout the term of the lease  you may want to negotiate a clause to minimise disruption to your business and any potential loss of income for example.

• Assigning the lease/Subletting

When possible, you should negotiate a clause in your lease that allows you to assign the lease or sub-lease part of the premises.  Assigning the lease may be necessary if you sell your business during the term of the lease, or if your business structure changes, and you need to re-assign the lease.  Assignments and subleases are subject to a landlord’s consent but an experienced lawyer can negotiate and draft a clause on your behalf that suits your requirements.

3. At the End of the Lease

Most commercial leases include a “make good clause” that requires a tenant to return the property at the end of the lease in the same condition that it was at the start, while others may include a clause that requires the property to be returned as a vacant shell.   Understanding your obligations at the end of the lease, and negotiating where required, are just as important before you sign.  Many tenants have been caught out by costly and time consuming “make good” clauses at the end of their lease!

Lamrocks Can Help

In the event the landlord is not willing to negotiate, it is essential that you still obtain legal advice pertaining to the lease terms before signing the lease so that you enter the agreement fully aware of your liability and legal obligation.

Lease agreements can vary considerably so having an experienced lawyer review the lease, explain your obligations, and negotiate any terms and conditions is a sound investment.    

If you are in the process of looking for new premises for your business, please contact me here at Lamrocks before signing on the dotted line.