As a small business in Australia, rental costs will be one of your biggest expenses, which can significantly affect business cash flow. With today's rising costs and growing concerns about economic uncertainty, reviewing and negotiating your commercial lease terms is essential. Taking the time to review the conditions of your lease ensures your interests are protected and positions you in a much better financial position to weather the storm.
Lease negotiations can seem overwhelming and lengthy, but the right advice and a few key insider hacks can save you in the long run. Here are the top 10 most important things to consider when reviewing your terms from the leasing expert, LPC.
1. Rent Reviews
Most commercial and retail leases will have a provision for yearly rent increases,
and there are different types of rent reviews. First, there's the fixed percentage increase review, where you and the landlord agree on a fixed rate increase over a period.
There's also the CPI rent review, where the increase is based on the consumer price index, a measurement of inflation. In today's market, CPI is at 6%, the fastest annual growth in 21 years, so it's best to avoid this review arrangement in your current negotiations.
The final one is called market rent review, which entails reviewing what other tenants are paying for in nearby commercial premises. Usually, market rent reviews are carried out when your lease is about to expire and you wish to negotiate before your option is up.
2. Contraction Right
Contraction right is helpful for small businesses leasing office spaces or stores that can be split or subdivided. For example, you decided to rent the whole ground floor to have a computer store and a mobile tech repair store next to each other.
After two years, you decided you wanted to focus your time and energy on the computer store, so having a contraction right on your lease agreement will allow you to hand back a portion of the space to the landlord.
3. Utilisation Clause
A utilisation cause is one of the most difficult to negotiate but has proved very valuable for small businesses during the recent lockdowns.
This clause protects the lessee and allows them not to pay rent when they can't trade during extraordinary circumstances such as COVID-19. Landlords essentially lose money when this happens, so while possible, it's very tricky to negotiate, and you would need help from experts with proven experience in handling these situations.
4. Expansion Right
If your landlord has another space for rent next to yours, an expansion right gives you the first right of refusal once the next-door space becomes available. This gives you the option to expand your business if the opportunity arises.
5. Landlord Commitments
When choosing spaces to rent, small business owners often rely on information provided by landlords. For example, you decided to rent a ground floor store in a shopping centre because the landlord said that at least a thousand people pass the store daily.
Information like this should be included in the lease agreements, so if you find out after a few months that foot traffic is not as high as your landlord promised, you have recourse to take against them.
6. Abatement Clause
For any leasing agreement, the landlord has the duty to take reasonable care of the premises and avoid causing damages or interruption to the tenant's operations.
For example, when the air-conditioning breaks down in your store, the landlord usually needs to fix it within two business days. If not, and it leads you to loss of business, you are entitled to a 50% or full abatement rate for the relevant period.
7. Make Good
In leasing agreements, tenants usually have the duty to hand the space back to the landlord in the same state they found it in.
This works for short-term leases, but what happens when you've been in a long-term tenant and have made considerable improvements in the space? This is where Make Good terms are valuable.
When you've carried out a fit-out in the space, you are essentially giving your landlord a much better investment. To help with negotiations, you can agree on the Make Good course if you leave after your three-year lease agreement expires. However, if you have a three-year option and choose to exercise it, this clause should be removed.
For a small business, having an option is important. It just gives you longevity at the property. If you invest everything in a fit-out or have built a name in the area, you don't want to lose these only after a couple of years.
It's usually best practice to have an option with the same period as your lease. So, for example, a two-year lease should also have a two-year option on top of that.
Landlords will often ask you to guarantee the lease, but that doesn't mean you should do it. The landlord can come for your assets if you forfeit your rent and have personally guaranteed the lease. While it's a lot of money upfront, providing a security deposit or a bank guarantee is a better option as it protects small business owners' personal interests.
When negotiating lease agreements, always ask for some incentives. For example, say you want to carry out a fit-out or upgrade the air-conditioning to improve the customer experience in-store, you can ask the landlord for some assistance. You can also negotiate a few months of free rent if the landlord can't provide cash up front for the expenses.
Lease negotiations are not as difficult as it sounds when you know what questions to ask or things to look out for. The trick is finding a fair and balanced middle ground for tenants and landlords.
However, we know that not all small businesses have the time, resources, and confidence to negotiate leasing terms. So, Leading Edge Retail, Australia's largest network of independent retailers, has partnered with LPC, leaders in commercial lease negotiations.
Our members have direct access to LPC's experts, who have the experience, skills and knowledge to help them achieve a tenant-friendly lease. In addition, LPC provides support for lease renewal negotiations, new premises searches and more.