Common mistakes with commercial leases by SMEs

From

Peter Townsend

Small business owners can be very naïve about their obligations under the lease of their business premises. A number of issues keep cropping up again and again:

First – yes, commercial leases are very difficult to read and understand but the business owner must at least make an effort to fully comprehend the important points.  As legal advisers, we help the owner understand the legalese but we’re not running the business and only the owner will know whether or not the obligations are reasonable and realistic.

Second – for retail leases there’s a disclosure statement that summarises the lease.  Study it carefully because it’s a really useful summary of what’s involved.

Third – commercial leases are not residential leases. They’re longer – sometimes much, much longer – and the tenant can’t simply walk away because things don’t go according to plan.  As well it may take the landlord much longer to find an alternate tenant and during that period the current tenant must still pay the rent whether they’re using the premises or not.

Fourth – if you get into trouble then move as quickly as you can to find a new tenant.  If you have to pay some of their rent over the term it may still be cheaper than racking up a huge bill with the landlord.

Fifth – check the wording of the assignment clause and the usage clause.  You need the usage to be as wide as possible so that if you need to assign the lease to someone, it doesn’t have to be someone who will use the premises for exactly the same purpose as you’re doing.

Sixth – be sure the lease obliges the landlord to operate and repair the air-conditioning.  You’d be amazed at how many leases don’t say that and how many tenants sweat it out in summer because the landlord is too distracted to do anything about the broken air conditioning, though they’re still demanding their rent.

Seventh – is the landlord (or should they be) offering a rent holiday for the first few months or longer?  Make sure you know what the market is offering in general and in the particular locality for premises like yours.

Eighth – check the bank guarantee clause carefully.  If the bank guarantee can’t be recovered from the landlord for a number of months after expiry of the lease (while they get around to making sure you’ve left the premises in suitable condition) it may prevent you from getting another bank guarantee and therefore being able to sign a lease for new premises.

Ninth – while we’re on the subject of the ‘make good’ at the end of the lease, make sure you understand what’s required (cleaning? painting? re-carpeting? demolishing partitions?) and perhaps set up a fund from day one where each month you save for the costs of the ‘make good’, which can be substantial.

These are just a few of the very many things that need to be considered.  Commercial leases can’t be taken for granted and can’t be left for someone else to review.

By Peter Townsend, Principal

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