TIPS WHEN NEGOTIATING A LEASE

Choosing the perfect premises to run your business from can be a tough process, but it is just the first step in securing your location and opening your business’ doors to the public. The process of lease negotiation and the agreement that is ultimately reached between a landlord and a tenant can set the tone of the relationship between the parties for years to come. Although you and your landlord may have reached agreement on many of the commercial terms of the lease agreement (and may have even entered into a heads of agreement setting out those terms) it is crucial that the lease is properly reviewed and negotiated and that you receive the appropriate advice so that you are aware of all of your rights and obligations under the lease.

#1 WHAT CAN BE NEGOTIATED  

As a tenant you may feel like you have no power when it comes to negotiating the terms of your lease. You may find yourself questioning which lease terms are actually negotiable and which are already ‘set in stone’. Technically speaking all of the lease terms are open to negotiation including the rental amount, term of the agreement, obligations to pay outgoings, fitout and the make good requirements etc. A number of the additional but still fundamental terms and conditions may not have been covered in initial discussions with the landlord or in any heads of agreement and therefore still need to be negotiated.

It’s important to remember that if you don’t make requests and raise concerns with your landlord at the outset you may not have another opportunity to re-negotiate the terms later on. On the other hand, there are a number of terms and conditions that are considered to be ‘standard’ for certain types of leases. A solicitor will be able to provide guidance as to which clauses of the lease are the norm considering the type of lease being entered into and which points you should consider pushing back on with your landlord.

#2 BEWARE THE LANDLORD FRIENDLY LEASE

The landlord’s solicitor will typically prepare the lease. In addition to many of the lease terms and conditions not having been discussed, the landlord’s solicitors will almost certainly present their standard lease weighted in the landlords favour. This ‘landlord friendly’ lease could include a requirement for additional fees to be paid to the landlord (including open ended administrative fees) or legal and other costs associated with negotiation and preparation of the lease even if this was not agreed (unless the lease is a retail shop lease in which case the legislation prevents the landlord from charging the tenant for these costs), or other clauses which are to the tenant’s detriment.

With the landlord’s solicitor preparing the lease you are also relying on the landlord having provided clear and fulsome instructions to their representative. If any agreements between you and your landlord are not communicated or miscommunicated to their solicitors it is important that you have a second set of eyes review the lease to confirm it reflects the agreement reached.

The solicitor you engage should conduct a full review of the lease, take your instructions and negotiate amendments to the document in order to strike a fair balance between the parties.

#3 KEY TERMS AND CONDITIONS

The terms of the lease negotiated could remain in effect for a number of years and could have potential impact on your business operations. For example, the permitted use under the lease must reflect all business activities you intend to carry out on the premises. If this is not properly negotiated and described in the lease your business activities themselves could be a breach of the lease and cause for the landlord to terminate the lease.

Some other key terms and conditions of the lease which should be properly negotiated include:

  1. Repair obligations – as a tenant you must be aware of when you are responsible for repairing damage to the premises. For example, are you responsible for repairs to the premises where damage is caused by flooding or some other naturally occurring event? Must you repair damage caused by vandalism? What if your staff are responsible for the damage?
  2. Terms of Guarantee – if you are entering into a lease as a director of a corporate entity, and the lease contains a director’s guarantee, you must ensure that you fully understand the repercussions of that guarantee and when you will be personally responsible for complying with the obligations of the corporate tenant entity.
  3. Entire Agreement – most commercial leases will include an ‘entire agreement’ clause which states that the agreement executed by the parties represents the entirety of the agreement. The effect of this clause is that previous correspondence or representations by either party (including any heads of agreement) will not be deemed to be part of the agreement and therefore not binding on either party. It is important that this clause is included in your lease so that the landlord is not able to rely on any previous written or oral agreements regarding terms and conditions that are not included in the lease. The flip side of this is that you must ensure the lease actually reflects what was agreed under your heads of agreement (or otherwise) as you will not be able to rely upon any previous agreements, statements or representations.
  4. Redevelopment – if your commercial lease contains a redevelopment clause the landlord may be able to terminate the lease prior to the expiry date to carry out major redevelopment works. If this clause is included in your lease you must ensure the lease requires that the landlord adequately compensate your for your loss. You may not want to accept a lease which contains a redevelopment clause as this will greatly impact your business operations.

The terms of the lease and therefore your rights and obligations will likely be binding for a number of years following execution so obtaining advice prior to signing is essential.

Tessa Knight
Lawyer
Ph:       +61 7 4617 8777
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