So, you’re considering entering into a lease for a commercial premises.
This is a serious step and one that’s likely to be critical to the success of your business. Getting a lease that works for you is about more than location and rent. There are other key factors that can determine whether you’re going to have a good or bad experience as a tenant (or as a landlord for that matter!).
To help put you on the right path, we’ve set out five important things (in no particular order) that you should consider before you sign on the dotted line.
1. Rent: beware hidden occupancy costs
Rent is rent, right? Well, not necessarily. If you treat rent as the cost of occupancy rather than just the price paid for the right to exclusive occupancy, it can be determined in a number of ways. The most common forms are “net” or “gross” rent.
If you negotiate based on a “net” rent, you’ll be required to pay, in addition to the headline rent number, outgoings and operational costs that are incurred by the landlord for owning the property (think council rates, land taxes, insurance). A “gross” rent, on the other hand, will include some (or all) of the usual outgoings that apply in respect of the premises. One isn’t better than the other, and it may be that the total figure would work out the same, but there may be circumstances where either a net or gross rent will better suit your business.
If your potential landlord is a major property owner, you may also find that you have a base rent and a turnover rent that kicks in when you reach a certain turnover. These can be handy mechanisms to try and keep your rent proportional with your operational success, but they can also be administratively burdensome in terms of the information that you’ll need to provide to the landlord on an ongoing basis.
2. Term: keep your options open
Everyone starting a business or moving their business to a new location hopes that it’s going to be successful. However, you should try to negotiate a term structure that anticipates success as well as difficult times. Getting the balance right is important and flexibility is the key – if you can get it.
The most common way of achieving flexibility in a lease is by entering into an initial term with extra terms, or options. These can be particularly valuable if you’ve built a business whose value is inextricably linked to a particular site – you can invest and build value in your business knowing that you’ll have something that could be sold (assuming you leave enough time in the lease for the buyer to make their mark as well!).
3. Permitted Use: give your business freedom to grow
The Permitted Use in a lease is usually covered by a single clause – but it’s not the size of the clause that counts in this case. The Permitted Use sets out what you can do on the premises. If it’s not in the Permitted Use, then you usually can’t do it. The tip here is to try and keep your definition of Permitted Use as broad as possible to give you the freedom to vary what your business can do as needs arise. If you’re looking to assign a lease, note that some leases have clauses that allow a landlord to deny an assignment where there would be a change in the permitted use of the premises from one tenant to another – make sure you keep an eye out for this sort of clause (and any other clauses that impose significant burdens on assigning the lease for that matter).
4. Make Good: don’t trash the place
At the end of your lease, the landlord will require that you hand the premises back in good condition (usually fair wear and tear excepted) and remove all your items. This is called “making good” It’s common for major landlords to go a step further and require the premises to be handed back in a “back to base” condition, i.e. gutted and services capped, for any new incoming tenant.
The costs of making good at the end of a lease can be significant and if you fail to do it, you may be deemed to still be in possession (and paying the rent!). This makes it important to negotiate as limited a make good obligation as possible. In any case, given that most make goods refer back to the condition of the premises before your occupancy, make sure that you put together a condition report (photos help too) when you first take possession, to help avoid future issues.
5. Security: it’s about more than changing the locks
Landlords will usually insist on being provided with security to ensure that the landlord’s risk of a tenant’s compliance with the lease is reduced. Security can come in many forms but the most common is a bank guarantee (for an amount equal to a specified number of month’s rent and outgoings) and personal guarantees from the directors of the tenant (and in extreme cases, shareholders).
Landlords and tenants are necessarily at different ends of the spectrum when it comes to providing security. Tenants should be aware though that the less security that they are obliged to provide to a landlord, the greater bargaining power they may have if a site performs poorly. Individuals that act as guarantors should make sure that they understand the potentially serious consequences of signing up to guarantee the actions of the tenant.