Six important things to remember when negotiating and reviewing your first commercial lease
Earlier this year, the team at LegalVision gave us some helpful tips on the legal basics of starting a new business.
Over the past few weeks, we’ve been looking at legal matters that can arise for a new business once it’s up and running.
Here, Tom O’Brien, principal lawyer at O’Brien Leasing, part of the LegalVision network, looks at what start-ups need to consider when moving into their own business space.
Many start-ups launch out of a garage or a living room before moving to a co-working space or sub-letting a desk or two from a more established business (usually under a license agreement).
If your business is successful and grows, there will come a time when you’ve got to look for a business space from which to run your start-up. This article sets out a number of key points to consider in the process.
The first issue to wrap your head around concerns leverage. First time tenants are often under the misapprehension that they have little leverage when negotiating a lease with a landlord.
You need to get out of this mindset before you even start looking for a commercial property to lease.
Over the last couple of years, a significant amount of commercial space has opened up in all of Australia’s major cities. Landlords are competing for good tenants. Use this to your advantage.
It’s important that you obtain representation, especially when renting your first commercial property. Many entrepreneurs will work with a real estate agent to secure appropriate premises.
When you’ve found the premises you want to lease, you should engage a commercial lawyer to review the lease documentation and enter any lease negotiations with the landlord and/or their representative on your behalf.
If possible, try and find a commercial leasing lawyer; a specialist in the leasing sector. A specialist will have a detailed knowledge of all the legislative requirements of a lease and will be able to quickly identify any onerous or unfair provisions in it.
3. What to expect from your lawyer
Make sure you get value for money from your lawyer. During the lease review process, a good commercial lawyer should give you guidance and advice in relation to what your rent covers (i.e. whether outgoings (utilities), cleaning services and parking are included as part of the lease arrangement).
Many leases hide this sort of information in the fine print, which is where your lawyer can assist. Your lawyer will also be able to advise as to what property taxes you may be liable for, what insurances need be obtained and how to structure the provision of security (if any) to the landlord.
4. Landlord concessions
During the negotiation process, your lawyer should be pushing for landlord concessions. Obviously negotiating the rent down will be the first priority, but there are other areas your lawyer can focus on.
With increasing commercial space opening up, landlords have become more amenable to providing new tenants with incentives to lease their premises. During the negotiation process, a lawyer can “feel out” the lessor in relation to what they may be willing to concede. These concessions can include a free rent period at the beginning of the term (which can be really valuable if you need to conduct a fit out of the premises – and can enable you to only pay rent when your business is up and running after any such necessary works at the premises).
5. Duration of lease and rent amount
If you’re happy with your chosen premises it’s important to ensure that you have the option to stay there longer term if you so choose. Your lawyer should negotiation option periods that allow you to choose whether to keep renting the premises after the term of the initial lease is up.
Typically, a landlord providing an initial three-year term may be amenable to providing a further two to three-year option period. When negotiating this aspect of the lease it’s important to be familiar with how any increases in rent may be assessed. It is fairly typical that during an initial term annual increases in rent correlate with an annual calculation of any increase or decrease in the CPI.
It is also fairly typical for the amount of rent to be paid to be reviewed on a market basis at the beginning of any option period. These are important aspects to consider and matters a commercial lawyer should provide advice on.
6. Termination and assignment
Another important issue to consider is ensuring that there is a termination agreement stipulated in the body of the lease. This gives you as a tenant the option to exit the arrangement, for instance if your business outgrows the premises or if you decide the location is not ideal for your business needs.
Again, these are issues which a commercial lawyer can provide guidance and advice in relation to.
The capacity to assign the lease agreement to a third party is also important. It is preferable that the landlord’s requirements of the tenant are not too overbearing. This ensures it is not difficult for the tenant to transfer the lease to a third party in circumstances where they want to sell their business or move on from the premises.
If you’re considering moving premises it’s important to factor in ample time for search and negotiation process. Make sure you work with a specialist commercial leasing lawyer if possible. Get in touch with LegalVision with any leasing questions!
Tom O’Brien is the principal lawyer at O’Brien Leasing (part of the LegalVision Network). The specialist online lawyers in the LegalVision network provide businesses with access to high quality and speedy legal services.