What You Need to Know When Signing a Commercial Lease for your Small Business

If you are setting up your business or have outgrown your existing premises, you might find yourself needing to lease a commercial property if purchasing property is not a viable option. Entering into a commercial lease agreement is a common practice for small businesses in Australia but there are a number of considerations that should be addressed before signing on the dotted line.

Check if the rent is fair

There’s more to agreeing on a decent price than you might realise. Commercial rent reviews are based on the market conditions, so you can expect to see an annual, fixed-rate, percentage-based increase in your commercial lease agreement.

There could be further conditions in your agreement, so make sure you know exactly what changes lie ahead and how much you’ll be paying. You should also know what space you’re paying for, including common areas such as hallways and bathrooms.

List all of the upfront costs

Clients can sometimes be surprised by the up-front costs when signing their first commercial lease. The biggest costs are usually legal fees and having to pay up to six months’ rent in advance.

If this isn’t accounted for, it can put a real dent in a new business’s cash flow. By going through all the details before signing a lease, there won’t be any nasty surprises.

Examine the make-good clause closely

At the conclusion of your lease, you’ll be required to return the property to its original plan and design. The requirements are different from a residential lease, so you’ll want to know exactly what you’re required to do.

There are a variety of scenarios, such as the removal of tenant property only; returning the property to the condition it was in at the time of the lease’s commencement; or completely stripping it back to a shell. There could also be a simple requirement of a cash settlement.

Include a sublease or reassign clause

There could be limitations on your ability to sublease the property, so make sure to know where you stand. There’s always a level of uncertainty in business, so it’s important to know steps you’re able to take if there’s a need to pivot your business in the future.

Commercial tenants should also know the difference between a sublease and a right of lease assignment. When subletting, the tenant basically becomes a landlord, leasing out part of the property to another tenant.

A right of lease assignment, on the other hand, sees the entire property handed over to a new tenant, who then takes on all of the liabilities and responsibilities in the original lease.

Agree on the bank guarantee

You’ll be required to provide your landlord with proof of financial security, in case you fail to meet all your contractual obligations.

The tenant and landlord will agree on the guarantee’s financial figure, with a six-month guarantee, or six months’ worth of gross annual rent, the most common.

Again, it’s important to know exactly how much you’ll be paying and when, to ensure your new business gets off to a flying start.

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