If you are an existing tenant of commercial premises, it is important to be familiar with the terms and conditions of the lease and know what your statutory rights are if the Retail and Commercial Leases Act 1995 (SA) (“Act”) applies. Whilst there are a few exceptions to the rule, generally, in South Australia, the Act will apply to your commercial lease if the premises consist of a “retail shop” and the rent payable under the lease does not exceed $400,000 per annum.
If you are a new business owner and looking to become a tenant of commercial premises the following information will give you a good starting point:
Step One – Research
- Familiarise yourself with your statutory rights and protections contained in the Act.
- Make a list of the things which are ‘deal breakers’ (where you are prepared to walk away) and a list of things you can compromise on.
- Check out the other tenants in the building. Are their businesses likely to compete with or compliment yours? To protect your business, consider requesting a special condition preventing the lessor from offering premises to prospective tenants who will compete with your business.
- Visit the local amenities. Is there a branch of your Bank, a Post Office or other important facilities or suppliers located close by? Are the premises easily accessible by public transport? Is there adequate parking for clients (including delivery/loading zones for suppliers).
- Investigate what the occupancy rates are like for similar grade premises and how long the premises you are looking at have been on the market. Low occupancy rates and long term vacancies can provide an opportunity for strong negotiation on terms.
- Make sure you know the true value or cost of any lease incentives offered. Often the lessor will offer lease incentives to secure a new lessee. Lease incentives could include free fit outs of the premises, rent free or rent-discounted periods and lease surrender payments. It is important to discuss the form of the incentive with your accountant to see whether the incentive offered is beneficial to your circumstances and if not, seek to vary the incentive offered.
- Be clear about who the lessee should be. The lessee could be a company or an individual. It could also be a trust or a partnership. The most appropriate structure will depend on how you have structured your business. In most cases, the entity that owns and operates the business is also the lessee. It is a good idea to consult with your legal advisor before entering into negotiations.
Step two – Read the Documents
As soon as you enter into negotiations with the landlord (or its agent) you are entitled under the Act to be provided with a written copy of the Proposed Lease and a Disclosure Statement.
A written copy of the Proposed Lease setting out the basic terms and conditions of the lease include things like:
Permitted use of the premises
You will need to disclose to the landlord what business you intend on operating at the premises. The type of business conducted at the premises may require council and/or other regulatory approvals therefore you ought to frame your negotiations so that you are only bound by the lease once you have obtained all of the necessary licences, permits and approvals to conduct your business from the premises.
Alterations and Installations
Check the lease to see whether you have reasonable rights to make alterations to the premises. This may be important in terms of the design and layout of your business. The lessee is usually responsible for reinstating the premises and making good any damage caused, and leaving the premises in the same condition they were in at the commencement of the lease.
What are your insurance obligations? A lessor would usually require you to take out the following types of insurance: – public liability; building; plate glass; fixtures and stock; loss of profits and loss of rent. The lessor may ask to view copies of your policy from time to time to ensure that the policies properly reflect what is in the lease.
Maintenance and repair
As the lessee, you would usually be responsible for the maintenance and repair of any damage caused to the premises during the term of the lease. This includes painting the interior of the premises and in some cases, the exterior, which can be very costly. Ensure that your obligations don’t require you to undertake maintenance or repair of a structural or capital nature and that the lease provides a clause which excludes ‘fair wear and tear’. Paint and repairs is usually required every 5 years and at the end of the lease. Make sure that you are aware of the costs and have budgeted for them.
The lease will set out what your obligations are should you wish to assign the lease. Usually, the lease would require the lessee to do the following things:
- Provide the proposed incoming tenant with an ‘assignor disclosure statement’; and
- Provide to the lessor an ‘assignor disclosure statement’, accompanied by a written request to the lessor where you provide sufficient information to the lessor about the use to which the proposed incoming tenant proposes to use the premises for, the financial standing and business experience of the proposed incoming tenant.
Under the Act, the Lessor is not obliged to consent to a request to sublet the premises. If the Lessor has provided its consent to a sublease, the terms and conditions of the sublease cannot be greater than that of the head lease.
A dispute may arise even if your lease is well-documented. If a dispute has arisen, check the lease document to see what it says regarding a dispute and refer to the relevant clauses in the lease and work through the process. If required, mediation is available through the Small Business Commissioner, however a small fee is payable and both parties must agree to the mediation process.
Guarantees and Rental Security
Where the lessee is a company it is usual for the lessor to seek guarantees from the directors of the lessee. Increasingly, lessors are seeking security in the form of bank guarantees to provide them with comfort that the obligations of the lessee will be met. It is important that you factor in the costs associated with a bank guarantee should one be sought by the lessor.
A Disclosure Statement would include things like:
The term of the lease and options to renew
Under the Act, you are entitled to a term of at least 5 years. You can negotiate to either commit to a full 5 year term or a shorter initial term with the option to renew to extend the term to a full 5 years.
The rent and review mechanisms
The rent is usually offered on a $ per square metre basis. In terms of review mechanisms, it is common for the lessor to offer either a fixed percentage increase or an increase based on the Consumer Price Index, with a market rent increase on the term being renewed.
Includes costs like government rates and taxes; insurance; maintenance and cleaning common areas; consumption of utilities such as electricity and gas; heating and cooling of the premises, security; strata and/or community management fees and car parking spaces. Check these carefully as these costs can be overlooked if the focus is just to consider rent costs.
The consequences of breaching a term of the lease
Familiarise yourself with these sections so that you are fully informed of any action that the lessor may take against you in the event that you are in breach as there are serious consequences.
Note that failure by the lessor to provide you with a disclosure statement (or providing one that contains information that is materially false or misleading) could result in the Court making orders to avoid the lease or the payment of compensation to the lessee.
Step three – Negotiation and the Agreement to Lease
Nine times out of ten the lease is a standard commercial lease and the lessor is likely to be reluctant to change any of the standard clauses in it. Changing clauses in the lease is also most likely to result in costly legal bills. Therefore where an agreement has been struck between the lessor and the lessee that varies any standard term or condition of the lease the details of these agreements are best set out in an “Agreement to Lease”, with those terms forming part of the formal lease.
Step four – Signing off
If you are venturing into a new business, the decision to enter into a commercial lease is a significant business decision. Once it is signed, you are legally bound to paying the rent and outgoings in addition to fulfilling any other obligations you have as a tenant under the lease. It is a good idea to seek independent legal advice before signing off.
Although there are many issues you need to consider when making the decision to enter into a lease, the aim is to come to an arrangement which will meet your business objectives, in terms of growth and profitability, both in the short and long term. In the current rental market remember that most things are negotiable!
For further information, please contact the author.
This article is posted in Adelaide, South Australia by Tri-meridian Corporate & Commercial Law and is intended to be used as a guide only. It is not, and is not intended to be, advice on any specific matter. We do not accept responsibility for any acts or omissions resulting from reliance upon the content of this article. Before acting on the basis of any material in this article, we recommend that you consult your professional adviser.