Every great business begins with a great idea, product or, even better, a vision. While you might spend many months (or even years) clarifying this vision, preparing business plans and securing finance, at some point you will be ready to bring your dream to life. For many businesses this will mean establishing a shop front and for most it will mean signing a Commercial Lease.
In this two part series I will explain the Top 10 things you must know before signing any commercial lease. My suggestions include things to look out for, but more importantly, the questions you must ask to optimise chances of success. After all, with some estimates suggesting that as many as one in three new small businesses fail within the first year, you want to do everything in your means to ensure that you don’t become a statistic.
- Disclosure Documents and Why They Must Be Read
Never, ever, ever sign a contract without reading all the accompanying documents. In fact read everything, contract included, in detail. Yes, the fine print too.
Prior to executing the formal lease you will be provided with a disclosure document. This document is a prescribed document, meaning that it is the obligation of the lessor, pursuant to the Retail and Commercial Leases Act to provide a completed document to you as the intended lessee.
Disclosure documents contain a shortlist of critical information about the lease and premises, including rent, any increase to rent (when it occurs and how it is calculated), the term of the lease and whether there is any extension along with the estimated value of outgoings you will need to pay.
As a lawyer, reading and understanding contracts and legal documents, and the nuanced wording of these, is what I do on a day to day basis. Since the wording of such documents can be hard to decipher it is always best to seek professional support from a solicitor to help you to cut through the jargon and get to the heart of what is really being said.
- Length of Leases & What Legislation Says About This
All Commercial Leases in South Australia must provide for a minimum term of 5 years.
This is legislation.
If a lessor demands that you can only remain for, say, 3 years, then you must sign an acknowledgement that you waive your right to a 5 year term and that this has been explained to you by a solicitor.
What many people are unaware of is that you can break down that 5 year term into any smaller terms you like. For instance, you may have a 2 plus 3 year lease. In essence, as long as it all adds up to 5 years it is lawful. What this means is that you have the option, at the end of the second year, to leave the premise without consequence, or you can renew it (the finer points of extending leases are described below). You may even seek a lease with a 1 plus, 1 plus, 1 plus, 1plus, 1 year term. Of course the lessor may reject such a proposal and securing such a lease will probably come down to the strength of your negotiating skills.
- Extensions of Lease: What You Must Understand
Most Commercial Leases will provide for an additional term. For instance, you may be provided with a 5 year lease with option of a renewal term of a further 5 years. What is important to understand are the terms and conditions attached to the granting of that renewal.
Sometimes a lease will suggest that if you have breached a term of the lease (for instance not paying rent on time…once), even if rectified, that you may be denied the right to renew the lease. Of equal importance is the timeframe within which notification of your desire to renew the lease must be made. It is common for a 5 year commercial lease, to require a lessee to notify the lessor of their attention to renew for the further term between 6 and 9 months before the end of the current term. If you leave it too late the lessor may deny your request. The significance of this problem is two-fold. Firstly, you and your business will need to vacate the building. Secondly, even if the lessor is happy for you to stay, you are, in effect, renegotiating a new lease and the lessor may impose a significant rent increase (knowing that you are desperate to stay) since they are not required to abide by the existing lease terms.
- Mud Maps, GRO Plans: When and Why They Are Necessary
It is common for Commercial Leases to provide rights over only a certain area of a much larger building or site. There is nothing unlawful about this. However, it is critical that you ensure that a plan is annexed to the lease document, which identifies the exact area and boundary of your lease. Furthermore, this plan may also identify common areas which are to be shared with others. Commonly, lessors will provide a simple mud map. While this may provide a satisfactory amount of information for you, should you be obtaining finance from a bank (who may require a mortgage over the lease), the bank will NOT be able to secure their interest at the Lands Titles Office with a rudimentary drawing. Instead, they will require a formal GRO Plan, prepared by a professional draftsman, which will need to be lodged at the Lands Titles Office. It is common in those circumstances that YOU will foot the bill.
All Commercial Leases will contain a long section referring to indemnities. Effectively, you will be asked to protect the lessor should events arise that result in someone suing the lessor (as the land owner). For instance, a patron may enter your shop, trip and injure themselves. While the variety of indemnities are usually lengthy (and quite complex), it is critical that you fully understand what each and every indemnity clause means before accepting the lease terms. In doing so, you will be able to identify areas which you do not wish to accept responsibility for, and negotiate certain terms to reflect this.
Special attention with regards to indemnity clauses is required. After all, why should you agree to accept responsibility for something which you have no control over (for example faulty internal wiring of the building which might cause electrocution, or uneven pathways outside your shop which might present a trip hazard to member of the public).