Whether you’re renewing an existing lease, taking one over as a new business owner, or negotiating a new agreement in a ‘greenfield’ site, this all-important document governs one of the biggest expenses you’ll incur as a business owner.
It’s all too common to end up imprisoned by a lease, so we’ve pulled together a few fundamental tips to help you navigate your lease negotiation and secure the best outcome.
The first and most important thing to remember is leases are usually long-term arrangements with lengthy lead times (see term section below), so before you enter into any agreement, make sure you do your research or pay a broker to negotiate on your behalf.
1. Lease Cost/Market Conditions
If you’re entering into a lease agreement for the first time, be aware that the cost of commercial space is determined by the square metres of the premises, multiplied by the price per square metre. You can then divide this number by 12 to determine the monthly cost to your business.
For existing lease holders facing a lease renewal, it’s critical that you stay abreast of the commercial rental market in your strip or shopping centre. Armed with this key information, approach your landlord months out from the review date and get the conversation started early – you want to make sure the negotiation is underway well before the renewal date approaches.
Landlords love long term leases with rent reviews in their favour (see more below). However, the longer the proposed term, the more leverage you have to negotiate more favourable terms such as an overall percentage discount or a rent-free ‘start-up’ period (6-12 months) as an example. Generally, this is a perk of a greenfield start-up business though, rather than an established operation.
It’s a fine line nevertheless – invariably, the needs of your business will change and develop over time, so it may be the case that you’ll require flexibility down the track, so don’t sign on for a lifetime unless it marries up with a methodically planned long-term business plan.
If you’re buying an existing business, your ability to negotiate lease conditions are somewhat limited. It’s pretty much a case of what you see is what you get, and this will of course effect the ultimate price you pay for the business. But that said, if the lease has incremental annual increases, or ‘fair market’ rate increases, it’s best to steer clear unless other terms within the lease are adequately favourable and can offset those outgoings.
Aim to secure fixed annual increases or CPI increases at around three or four per cent. This goes for those negotiating a commercial lease for the first time.
4. Permitted Use/Assessing Space
If this is a clause in the proposed or existing lease, it’s well worth negotiating as broad as possible terms. In the future, your business may expand in different ways, have the need to give back space or sub-let space. You may wish to install new infrastructure or signage. Broad terms in the lease keep the door ajar to negotiate and possibly have the landlord help pay for some or all costs in this area.
Quite the opposite of a property rental agreement, a commercial lease will often include clauses around who is responsible for what when it comes to alterations and improvements to the site. You want to make sure you have the flexibility to make improvements where and when you need to, whilst also obligating the landlord to incur some of the cost where appropriate. As the tenant, you may also be responsible for returning the site to its original state. If so, this is an expense worth factoring into your original business plan.
6. Repairs & Maintenance
As above, the lease should very clearly state who is responsible for R&M over the term of the lease – this generally rests with the tenant in a commercial lease.
7. Assignment & Subletting
When negotiating a new lease the tenant should maintain the right to assign the lease or sublet the space to another tenant (subject to the landlord’s approval). The obvious upside of this is having other tenants or businesses pay for all or at least cover some of your rental expense.
8. Hire a Broker?
Whilst many aspects of a commercial or retail lease are quite standard, it’s well worth understanding your rights and obligations before signing anything.
If you’re a first-time buyer, you’re best to engage and learn from an established broker with specific experience in lease negotiation. They can consult on your behalf and make sure you get an outcome that suits the needs of your business now and into the future.
– Robert Whelan, Managing Director at AP Group