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Questions to ask - when signing a commercial lease

 Technology, automation and artificial intelligence (AI) seeks to cut out the very work that professional service advisors do.

By Law Squared

Taking on a commercial lease might just be a much bigger commitment than you realise. Even the relatively small weekly rent of $400 a week can run to well over $100,000 during a five-year commitment. By having a savvy commercial lawyer look over your agreement, you create insurance against any minor issues blowing up into liabilities that your business doesn't need. You're also creating peace of mind that your business has a strategic headquarters to propel its future growth. 

Here are five important questions that you can't afford to skip when you check our your business' home base. 

1. What's in your lease?

Leases tend to be many pages long and are not usually the most riveting documents. However, they represent a huge commitment for the business and are concern somewhere that you're probably going to be spending a whole lot of time in over the ensuing years. So it pays to be on top of what's encapsulated in the document. A few of the basics are rent, common area maintenance (CAM) and capital expenditures.

> Rent

Rent can be communicated in a variety of different ways. Depending on the style and type of property, you will end up paying rent depending on the size (in metres squared), per calendar month (pcm) or per annum. Don't forget, rent doesn't usually include outgoings like electricity, rates, and additional capital expenditures (which will be discussed below). Rent isn't always going to be the same either - it will most likely increase by 4% annually. This means that if you're taking on a lease for five years at $50,000/year, it is more likely going to be costing you $60,000 by the fifth year. 

> Common area maintenance (CAM)

Common area maintenance refers to the net charges which are payable by tenants, in addition to their rent, for any maintenance required for the common areas of the property. It is paid on a pro-rata basis, and the amount you pay for this fee will be dependent on the percentage of the building that you occupy. Be sure that the amount you pay isn't dependent on how much of the building is rented, and only the percentage that you are renting. 

> Capital expenditures

Another cost you should contemplate is capital expenditures. Those two big words refer to the basic costs of the building - i.e. heating, ventilation and air conditioning. It also extends to major repairs and replacements. It's a good idea to negotiate the limits of what you are prepared to pay. 

Overall, this raises the essential question - with all these potential costs, what's your ability to make payment? At this stage, it may be financially responsible to sit down and do a forecast or business plan to make sure that the rent you're signing up for, is realistic. 

2. Can I lease part of the property to someone else?

Leasing out the property to another person or entity while you are leasing is called subletting. Negotiating this into your lease agreement before signing the contract means that you can create the option to reduce your costs and attract more people into your office space down the track (if you want/need to!).

This isn't always as easy as it seems though. Lawyers who specialise in commercial leases often have stories of a well-written sublease ending in disaster, Landlords aren't always as eager to another another tenant on the property also, especially if they can't vet who it is beforehand. On the plus side though, having a sub-lettor might mean you can afford to stay in a great property for longer than if you were setting out on your own. 

If you're thinking that a subleasing clause is appealing to you, you will need to negotiate this before the lease agreement is signed, sealed and delivered.

3. Get by with a little help from your (landlord) friends

Be realistic about how much power you have at the bargaining table. Are you bringing an army with you to the new office? The answer to this will give you a good idea about how flexible the landlord is likely to be regarding those demands discussed above. If things don't go your way, don't burn your bridges. Having a great professional relationship with your property manager or landlord means that they are much more likely to be favourable in future negotiations, fix up maintenance issues that arise and be considerate of any requests to take on new employees. 

Also consider the length of your lease. Does your business' stability and opportunities allow for a longer lease? A landlord is more likely to consider an incentive for your 'fit out' or a rent reduction if you can demonstrate that you're likely to be in the building for a long time, and have a strong capacity to cover the rent. Everyone loves good tenants, especially landlords.

It's important to remember that the costs of running a business and owning property are different and therefor you and the landlord have opposing needs and challenges when in business. That is to say, landlords care about low business overheads, interests rates, vacancy rates and how much rent is coming in. A lot of this (bar rent) isn't really under your control but your landlord will appreciate you showing an interest. Look after that relationship. 

4. It's not me, it's you - What happens if things break down?

It's typical to have a dispute resolution process built into a modern-day contract. The type of dispute resolution (mediation, arbitration or both) will vary between agreements, although it's important to have this option to resolve trouble areas before going to court. Depending on which state/territory you are in, it is likely a tribunal (such as VCAT or QCAT) will be responsible for any dispute proceedings. 

5. What happens if you sell your business, or your business doesn't work out?

If a business plan doesn't get enough time to come into fruiting before you run out of cash, what will happen to your lease agreement? Can you transfer the lease to a new owner if you choose to sell your business? This provision needs to be in the document, or you might risk jeopardising your exit strategy.

If you do need to leave, what kind of notice provision is built into the lease? It's common for landlords to request a notice period of up to 24 months so that a new tenant can be found. Additionally, you may need to restore the office/building to the condition it was in before you arrived. 

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At Law Squared, we partner with passionate entrepreneurs and businesses who need our technical help and expertise. We’d love to have a chat with you, so feel free to drop us an email at hello@lawsquared.co.


 

Law Squared

hello@lawsquared.co

+61 9008 5954

 
 

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