Before You Sign The Lease into Law
A commercial lease is a major undertaking for any business. Understanding commercial leasing law is critical when you make such a large commitment. Is usually a long term decision which will have a serious financial impact on your business. It is a long term commitment both psychologically and financially. Given that the lease itself is a major agreement which you are going to have to live with it one way or the other, it is imperative that is a tenant you understand what you are signing and that its terms are fair from your perspective.
Getting Rent Review Clauses and Options For Further Terms Right
My name is Glenn Duker and I am a property lawyer and commercial leasing law expert based in Melbourne. I have assisted many tenants over the years who have come to me with leases where they had not obtained appropriate legal advice. They had rushed into the lease (wanting to get their business started) without legal advice and then had to deal with difficult circumstances as a result.
In the short article I want to highlight two essential items that you should be thinking about as a prospective tenant of commercial premises.
Commercial Leasing Law – Rent Review Clause
Rent review causes can be laid out in many different formats. It is typical during the term of a lease to have an annual fixed percentage increase (ranging usually from 3 to 5 %) or an increase (or decrease potentially) based on the consumer price index (CPI). Presently, in a softer rental market, landlords tend to adopt the fixed percentage approach. This ensures that the rent always goes up – and consistently so, which in turn adds value to the property as commercial properties are sold almost entirely off yield.
At the end of a rental term, a market review is usually adopted, which means that the landlord will first nominate the new rent as a rule. If the tenant disagrees, the rent will be assessed by an independent professional ( a valuer), the cost of which will be borne jointly by the parties. Market rent reviews are the subject of many disputes. From a tenant’s perspective, some of the power in the negotiation can be retained if you discuss the matter prior to being required to exercise your option. The landlord may well agree on the new rent beforehand, if you are willing to relocate if the new rent is going to be too high. If left until after the option is exercised (which some landlords will insist upon anyway a matter of policy – especially corporate landlords), as the tenant you will be subject to market conditions and, initially at least, the whim of the landlord. In rising markets, this can be a real surprise for a tenant and many disputes arise as a result.
Commercial Leasing Law – Number of Options for Further Terms
Options for further terms are extremely important for most tenants.Be that as it may, they are often not properly considered going into a lease. If as a tenant you are starting a new business, or even if established by moving to the next stage in your growth cycle, you may be tentative about entering into a long initial term: a long term commitment can be problematic if things don’t go as well as hoped and it is a financial commitment that can be hard to avoid (there are ways such as assigning the lease to another party but this can be expensive while waiting for the new tenant to appear). As a tenant, I would recommend the shortest possible initial term. This should not in theory bother the landlord either, unless the landlord is planning to sell in the near term. However, coupled with short initial term, I would recommend that a tenant secure as many options for further terms as possible. It will certainly mean that you have security of tenure going forward if you like the premises and it suits your ongoing needs; but an extremely important aspect which few tenant things through is what will happen if one day they want to sell the business.
In some businesses, such as an accounting practice, location is usually not that important. Yet for a cafe, clothes store, a grocer or a hairdresser – as but four examples – location can be critical to maximising the sales price. In other words, a business sold with a long lease or further terms which stretch out many years into the future will mostly be worth a lot more than a business with a lease with only a few years left. The reality is that buyers pay more for a long lease and often pay very little for a business with no lease left, in cases where the location is connected to the good will of the business.
Getting the lease right from the start is smart business. Understanding commercial leasing law before you commit is critical. Always get legal advice about your circumstances before you sign the lease. It is an investment that will not merely give you peace of mind but will likely pay off many fold in financial terms down the track.