Retail leases can be confusing, so here are five ways to ensure you find the most suitable leased premises for your business.
Is your business type permitted under the lease?
Many retail leases specifically state – or restrict – the type of business activities that can be conducted on the premises. This is due to a number of reasons, including workplace health and safety, existing business competition and licensing restrictions.
Be sure that your intended use of the premises aligns with the permitted use of the premises under the lease. For example, if you require an alfresco dining area or outdoor signage, ensure your lease allows for this.
Is there an option to renew?
Say you find the perfect premises and business is booming. Come the end of the lease, you would be pretty disappointed if you had to move. You may lose customers and even employees, which could be damaging to your brand.
When selecting a lease, be sure you have negotiated an option to renew and extend the lease term if necessary. For example, if your lease is for five years, you should consider asking for an option to renew for a further five years on the same terms of your original lease, including the same rent-review terms and rent increments – so there are no surprises down the track.
Is there an exit strategy?
It’s an unfortunate reality that many new businesses won’t survive. In fact, eight out of 10 businesses will inevitably fail in the first 18 months.
So how do you ensure you’re not stuck with heavy overhead costs in the event your business does not survive?
Make sure your lease has an appropriate exit strategy – that is, a plan to get out of the lease if you find your business struggling. This should be discussed with your legal adviser. It may include requesting a shorter lease term than the five-year standard, or may include special conditions, changes to the notice provisions, conditions regarding the deposit or a review of the applicable lease-termination fees.
Are the rent-review terms clear and understood?
A lease can go from terrific to troublesome as soon as the rent-review period approaches. Make sure you fully understand the terms of the rent-review provisions from the outset, including the number of rent reviews over the lease term, the increment calculations (whether fixed, CPI or based on turnover) and the notification processes associated with a rental increase.
If you go into the lease fully aware of the total costs under it, you’ll be able to budget more effectively and avoid unnecessary rental disputes later on.
Have all disclosures been made?
Under Australian state retail leases legislation, both the lessee and the lessor are required to make certain disclosures, within certain time frames, prior to the start of the lease.
If you have not received a lessor disclosure statement, be sure to request one. If the lessor refuses to provide one within the required time frame or at all, or the information is misleading, you may have the right to terminate the lease by notice in writing.
The lessor disclosure statement should contain information relating to all outgoings under the lease, details of any shopping centre or complex fittings and inclusions, services and facilities, number of car parking spaces, whether there is a head lease, fit-out works required, base rent and adjustments, administrative costs, alterations works, advertising costs and so on.
In addition, you as the lessee are required to give the landlord a disclosure statement that acknowledges having received the lessor disclosure statement, the lease and retail tenancy guide, and that you believe you’ll be able to fulfil the obligations under the lease.
With all facts and documents before you, you’ll be able to make an informed decision as to whether a lease is the right one for your retail business.
Keep up with Commercial Real Estate news.