What to Look for Before You Sign a Commercial Lease

A commercial lease is one of the most significant legal commitments a business owner will make. It is also one of the most commonly signed without proper review. Jamie-Lee Pouwhare, Principal Solicitor at Dawson Pouwhare says,

"I have spoken with business owners who signed a lease the same day they received it. A lease can bind your business for five, ten or even twenty years. That is not a document to skim."

Here are the things that matter most in a commercial lease, and why each one deserves careful attention before you sign.

The Lease Term and Any Option Periods

How long is the initial term? Do you have an option to renew, and if so, on what terms? An option to renew gives you security of tenure: the right to stay in the premises beyond the initial period, which can be critical if your business depends on its location.

"An option is only valuable if you exercise it correctly," Jamie-Lee notes. "Option periods have specific notice requirements. Miss the window, and you may lose the right entirely."

Rent and How It Is Reviewed

The starting rent is only part of the picture. How is rent reviewed during the lease: by CPI, by market review, or by a fixed percentage increase? Each mechanism can produce very different outcomes over a five-year term.

Market rent reviews can reset rent to current market levels, which may be significantly higher than what you are currently paying, and which may be difficult to dispute without the right lease protections in place.

Outgoings

Does the lease require you to contribute to outgoings? This can include council rates, water charges, building insurance, management fees and maintenance costs. In some leases, the outgoings liability is substantial and not always visible in the headline rent figure.

"Always ask for the estimated outgoings figure before signing," Jamie-Lee says. "They can materially change the true cost of the premises."

Make-Good Obligations

Most commercial leases include a make-good clause requiring the tenant to return the premises to their original condition at the end of the lease. Depending on how the premises have been used and what fit-out has been installed, make-good costs can run into tens of thousands of dollars.

"Make-good clauses are one of the most commonly overlooked aspects of a lease," Jamie-Lee says. "They are easy to ignore when you are starting out and excited about a new premises. They become very real at the end of the term."

Permitted Use

The lease will specify what the premises can be used for. Operating your business in a way that falls outside the permitted use can give the landlord grounds to terminate the lease.

"If you think you might want to expand what you are doing, or sublease part of the space, check what the lease says before you sign," Jamie-Lee advises. "It is much easier to negotiate these things before execution than after."

Assignment and Subletting

If you ever want to sell your business, transfer the lease to a new tenant, or sublet part of the space, you will need the landlord's consent. The lease will set out the conditions for that consent. Some leases make this straightforward; others make it difficult or expensive.

"A lease that is difficult to assign can affect the value of your business if you ever want to sell," Jamie-Lee explains. "It is worth understanding the restrictions from the outset."

Dawson Pouwhare Legal & Conveyancing reviews commercial and retail leases for businesses across Lake Macquarie and the Hunter. Contact our team on (02) 4954 8666 before signing.