From home office to leased office – lawyer Audra Oliveira-Ben outlines some of the trickier points to evaluate before entering into a commercial lease to accommodate your growing business.
Running your business out of your garage or spare bedroom may seem like the optimal solution for a new start-up. If Steve Jobs did it, so can you, right?
However, when you can no longer decipher where your home ends and business begins, you may need to consider alternative, commercial premises.
Entering into a lease should not be undertaken without serious consideration. You will be bound contractually for the whole lease term and, unless you can negotiate it, will not be able to terminate the lease early at your convenience, although you may be able to assign the lease subject to conditions.
Do not rely on any representation made by the landlord’s agent, including regarding the area of the premises, even if it is in an advertisement or other marketing material. Most leases contain a clause stating that you (as tenant) did not rely on any representation except as set out in the lease. Unless it is in the lease, you will be unable to claim later: “But the agent told me…”.
Verify the condition of the landlord’s plant, equipment and facilities. Check that everything is in good working order before accepting handover of the premises. Usually tenants have no claim against a landlord if there is a breakdown of services (subject to the landlord’s obligation to use reasonable endeavours to ensure those services are in working order).
Consider the rental rate per square metre. Assess this against similar local buildings with similar uses. Once you are happy with the premises, negotiate the terms of the lease.
If it is a commercial lease, request that each party pay its own legal costs (don’t just accept that you have to pay the landlord’s costs).
If you are doing a fitout, request a contribution from the landlord. The landlord will benefit from your fitout, so ask away! Incentives may include a rent-free period, lump-sum payment or combination of incentives.
Consider whether the rent review provisions are fair in the current market, including the frequency of any rent reviews.
Negotiate the length of the lease term and any options. Can you commit to the initial term? Do you have sufficient flexibility to expand your business?
If you are a company, consider whether personal guarantees by directors can guarantee the obligations of the tenant. If not, request alternative forms of security, such as a larger bank guarantee or security deposit.
Check your redecoration obligations. You should not have to transform the premises into any better condition than they were in before your first occupation, subject to fair wear and tear.
Also check your make good obligations at the end of the lease. These can vary from simply removing your belongings to bringing the premises back to a base building state.
Ensure any special condition you require is in the lease. Even if agreed to verbally by a landlord, unless the condition is documented the landlord has no obligation to effect it.
Be extremely wary of any of the below clauses in a lease and seek further advice:
- Landlord’s right to relocate and/or demolish the premises
- Termination of the lease due to resumption of premises
- Any indemnity provided to the landlord
- Unreasonable insurance obligations
If the landlord won’t delete these clauses, request a limit to their scope. For example, insist that relocation or demolition may only apply after X years.
Diligently note relevant dates in the lease. Any option period must usually be exercised in a particular form before a set date, or you will lose your right of renewal.
You will know when it’s time for your business to move out of the garage or spare bedroom into a home of its own. But before you sign a lease, do your due diligence. Get legal advice and ensure the lease is reasonably balanced between the competing rights and obligations of yourself and the landlord.
Audra Oliveira-Ben is a lawyer in the property team at Colin Biggers & Paisley.
Opinion: Why do so many claim to represent small businesses?
By Adam Zuchetti
Opinion: House prices not all doom and gloom
By Adam Zuchetti
Analysis: How can SMEs realistically stay competitive?
By Adam Zuchetti