If you have gone through the steps to turn your business idea into reality you may have discovered that you need to lease a commercial property to run your new venture. Before you race off and look at the top floor of the tallest building in the CBD, here are nine things you need to ensure you and your business can comply with before you sign on the dotted line...
You must be able to meet the terms of the commercial lease
Signing any contract means you must be able to comply with the terms of that contract. A commercial lease is no different. Your responsibilities as a commercial tenant can be much greater than a standard residential lease and include a litany of responsibilities from fit out and "make good" clauses, to rent increases, and long term lease agreements; every part of your lease terms are up for discussion during the lease negotiation period.
During your time negotiating your potential lease, you must make sure that you and your company can fulfill every single element of the agreement. If there is one individual element you cannot maintain you may consider having it changed, taken out of the lease or even walking away from the negotiations all together.
As with all lease agreements you must be able to pay your rent in a timely fashion. However, commercial leases may also attract an annual increase regardless of the business performance. The tenant may or may not be informed of any increases in rent, e.g. if your lease agreement states that rent will go up with inflation, but your landlord does not notify you of the increase the landlord is still entitled to the increased rent as per the original agreement because the tenant has agreed to the terms.
Pay any outgoings
Outgoings are expenses relating to the business, factory or shop that the tenant has agreed to pay in addition to the rent. As a tenant you will be informed of the outgoing expenses and your responsibilities to pay these during lease negotiations. Typically small businesses are provided with a disclosure statement that clarifies the percentages of outgoings you must pay to your landlord and when they are due to be paid. Small Business NSW provides clarification on this process.
Pay a security bond
It is increasingly common for a landlord to seek a security bond to protect them against defaults of a tenant, specifically against not paying rent. This amount may be equal to 3 or 6 months rent by way of a bank guarantee (if you are an individual) or a personal guarantee (if you are a company, in this case the company directors provide personal guarantees).
Pay for legal fees
In some cases, it is reasonable for the landlord to request that the new tenant pay for the legal fees associated with creating the new lease. The amount, if any, is usually discussed in the negotiation period between the tenant and the landlord. The tenant will also pay his or her own legal fees.
Typically, commercial leases are long term and more than 5 years. There are a variety of lease options but they are generally a minimum term of 3 years with options to extend. You may have seen advertisements for 10+5; this means a 10 year minimum lease plus the option to extend for a further 5 years if you choose. You and your business need to ensure that you can stay in the property for the length of the lease. A commercial lease agreement is one you may not be able to get out of early.
If you are a business owner you deal with risk daily, so insurance is the best tool you have to ensure that your business is safeguarded against accidents. As a business owner, reducing any risk you have will help your business succeed in the future.
You will need to consider the following types of insurance (to name a few):
Maintain and repair the property and any damage to the property
The tenant is responsible, in most cases, for the maintenance and repair to the property. In some cases the cost of the fit out are those of the tenants and in others, they are on offer from the owner/landlord. However, check the lease agreement closely for things like "directors guarantee" and "make good" clauses which can be at your cost also.
Call your local council
Make contact with your local council to check whether the business you are planning to run in your new location can indeed be run there and that you have the necessary permits to conduct business onsite.
Lease not fitting?
A commercial lease can be a mountain of work and may not be the right fit for your business. In some cases you may find the perfect property only to discover it's not for lease but for sale. Buying commercial property has its own advantages and disadvantages compared to leasing commercial property, so a purchase could open up your options and expand your venture in a whole new way.
Commercial business forms NSW
Make Good Obligations: the sting in the lease tale
Retail and commercial bond FAQ (SA)