Looking to enter into a Lease – 5 things you should be considering before you even receive a draft lease?
Looking for premises to conduct your business can be a time consuming and daunting process. Having a lawyer who is able to review draft leases, provide advice and recommendations will greatly assist in finding the best place for you to conduct your business. However, there are some considerations you should think about before you even entertain the idea of entering into and signing a lease.
1. Use of Premises
You will need to ensure that the way you want to use your business premises is allowed for in the draft lease. All leases make specifications for what the premises can be used for, which will be the lease term called “permitted use”. This clause will specify what the premises can be used for and generally restricts using the premises other than what is allowed for under the permitted use.
Because leases restrict how the lessee can use the premises, it is important this is allowed for in the permitted use. If the lessee’s intended use is not allowed for in the permitted use, then the lessee will face a lot of difficulty in using the premises. If this occurs then the lessee should request to alter how they originally intended to use the premises to suit the permitted use outlined in the lease. A lessee should also ask about the operating hours for the premises, to ensure a lessee can use the premises during the hours they wish to. Lessee’s should also seek clarity on whether there will be any penalties for using the premises outside of the allowed trading hours.
If a lessee wishes to put up signs, there will be additional work that will be required. The will a lessee likely need to provide the lessor with the sign for approval. There may also be council restrictions on what type of signs may be displayed and whether they require approval by the council.
2. Lease Term
The length of the lease (from the start to the end date) will play a crucial part in determining where a lessee will set up their premises. A lessee should have an idea for how long they want to use the premises for, as business leases are typically provided for on a yearly basis. Knowing how long a lessee wishes to use the premises for and how long the lessor is willing to provide as the lease term will assist the lessee compare different premises and decide which one most suits their needs.
A lessee should also look into whether the lessor is willing to provide any lease renewal options. Renewal options allows the lessee to extend the term of the lease. So long as the lessee meets the lessor’s requirements around notifying of taking up the option, the lease will continue on the same terms (other than the increase of rent).
3. Payments to Lessor
One of the biggest considerations will be surrounding money, how much will the lessee be required to pay to the lessor. While most will consider the rent payment (which is a large financial contribution to the lease), it may not be the only payment the lessee is required to make. The payments the lessee must consider include
- Rent – how much will the rent be and when is it due to be paid. Is it to be paid monthly and on what day of the month. Rent will also typically increase annually so a lessee will have to be prepared to pay increased rent. On top of that as soon as a lessee receives a rental amount proposal, they should be clarifying whether that amount is inclusive or exclusive of GST. If rent is exclusive, then the lessee will need to calculate the GST amount they will need to pay for the rent.
- Outgoings – most leases require a lessee to reimburse the lessor for charges on the property, such as property maintenance fees, council rates and water bills and electricity. Outgoings will be apportioned between all the lessees to the building. It is nevertheless a recurring cost that the lessee will pay to the lessor if the lease permits it.
- Security deposits – the lease may require the lessee to make a payment to the lessor in case the lessee defaults under the lease. This sum is typically substantial, being the cost of around three to six months’ rent. If the lessee defaults under any obligation under the lease, they may risk not being refunded the security deposit.
- Insurances – the lease will most likely require the lessee to take out multiple insurances over the property. The lessee must be prepared to pay the premium to ensure those insurances are in effect during the lease term.
4. Terminating the Lease
A lessee should be aware of when can the lease be terminated. Because leases are typically drafted by the lessor’s solicitors, leases are drafted to generally restrict when the lessee can terminate the lease, while giving the lessor more options to terminate. It is vital that lessees are made aware of when each party can terminate the lease and what alternatives the lessee has to terminating the lease. The alternatives may include a surrender or assignment of lease which will typically have lessor requirements to satisfy before walking away from the lease.
5. Personal Liability
If the lessee is a company, the lessee’s representative should always ask whether a personal guarantee will be required. If the lessee is a company, then the lessor may require the lessee’s directors and/or shareholders to personally guarantee the lease obligations of the lessee. A personal guarantee is not something to be taken lightly, if the lessee defaults under the lease then the person giving the guarantee is promising to be responsible for the lessee’s debt.
If you have any questions or require assistance with drafting, renewing or drafting your lease in Queensland, please contact the property team at NB Lawyers for more information.
Kayleigh Swift, Associate
Kayleigh Swift is an associate in our Commercial and Property team who assists with Employment Law matters. With a high level of experience in commercial and retail leasing, voluntary and involuntary purchase and sale acquisitions, property development and employee relations, Kayleigh provides practical advice to ensure smooth business transactions.
Chloe Skubis, Lawyer
Chloe Skubis is a Lawyer in our Property team who assists with various conveyancing transactions. Chloe is very experienced in residential conveyancing and is a problem solver. She always provides efficient service to all her clients.