Commercial Leases – Ines Brcic – Melbourne Law Studio
Ines Brcic – as interviewed by Anastasia Misarvidis-Tyshing
The Covid-19 lockdown inspired many to pursue their dreams and create a small business. For new entrepreneurs, navigating the creation of your business can be a challenge. Commercial leases are an important part of business, making your understanding of the requirements surrounding them crucial. So, what are the “need to knows” when it comes to commercial leases?
What is a commercial lease agreement?
All leases are written agreements between two parties (e.g., the landlord and the tenant). What differentiates a commercial agreement from a residential one is the purpose of that space. Basically, if the space is going to be used for anything other than residential, then it will most likely fall under commercial.
What kind of commercial lease agreements are there?
There are a few different types under the same umbrella, but the prevalent ones are retail and general commercial leases. The easiest way to differentiate the two (until you can get some legal advice) is to understand that both are for businesses, but the former applies to ‘retail’ activity, such as sale or hire of goods or the retail provision of services, and the latter is for all other things (with some exceptions, of course).
Are the terms commercial lease negotiable?
All commercial leases and retail leases alike are generally negotiable until the document is signed. Whether the Landlord wants to negotiate is a different story, but the terms and conditions can be varied before signing.
Can the agreed terms of a commercial lease be changed?
Whether terms can be changed varies depending on the situation. The first point of reference is the lease – what does the document you signed say? Strictly speaking, unless you have the consent of the landlord, or there has been some sort of breach, it can be really difficult to change or amend a lease.
When and how could the rent be reviewed and varied?
Almost all business purpose leases will contain provisions for a process by which rental payable is reviewed. The most common methods are, market review, fixed percentage increase or consumer price index (CPI) increase. Each option has its own advantages and disadvantages so it is crucial to carefully consider how and when rent will increase so that you can plan accordingly.
Do I have to give a personal guarantee on a commercial lease?
It is not uncommon for landlords to ask an individual, such as the director of a company, to guarantee the rental on behalf of the company. Because companies are separate legal entities, unless a director gives the guarantee, it can be difficult for the landlord to hold a person accountable in the event that the company goes under. If your business does not have the financial history required to satisfy a landlord that it can meet its obligations under the lease, then the landlord may ask for a personal guarantee as well as a higher security deposit. Personal guarantees come with a whole host of legal implications and should not be executed without getting advice from a lawyer first. This is a really important point to remember.
Why should businesses, especially new businesses with limited funds, spend money on legal advice on a commercial lease?
Start-ups and small business owners especially are really cost focused, and a lot of energy goes into saving money. But even if we do only rudimentary calculations, it is easy to see why spending a couple of thousand dollars for legal advice is a good idea.
Let us have a quick look at an example. You sign a lease for $30,000 per annum for an initial term of 3 years. You have on top 2 more 3-year options, that is a potential lease duration of 9 years. To keep it simple we will exclude rental increases.
9 years of rent at $30,000 per year is equivalent to $270,000. That is a huge financial commitment and a massive liability. At best, your business (and you personally if you give a guarantee) are responsible for $90,000 for 3 years rent for each option.
Spending $2000 (guesstimate) on legal advice is merely an expenditure equivalent to 2.22% over 3 years or .74% over 9 years. When comparing the commitment and burden of the lease to the legal fee, it is a no brainer. Get the advice.
When looking into commercial leases there are many aspects to consider. In order to make sure you are getting the most suitable deal for you and your business, seeking legal advice is crucial. For all your legal needs, and to find a lawyer without the bill shock, head to www.legallyyours.com.au.