A lease is an agreement between the owner of business premises (the landlord or lessor) and the operator of a business on the premises (the tenant or lessee).
When you enter into a lease you are agreeing to pay monthly rent for the term of the lease, usually a number of years. If the rent is paid late the landlord can take possession of the premises without written notice and can lock you out. You will be liable for the rent until another tenant is found.
A lease therefore involves a serious commitment on your part and you should get legal advice about all of its terms before signing it. Other things to be aware of are as follows:
1. You should check with the landlord or the local Council to see if there is development approval for the kind of business you wish to conduct on the premises. If not, you will need to apply for development approval from the Council;
2. Also, if you need to do a fit-out or building work check with the council if you need to lodge a development application;
3. You can negotiate a rent-free period with the landlord if it will take some time to set up your business. Also, you can make the lease subject to the local council granting development approval or simply wait for the approval before entering into the lease;
4. If the landlord is to provide fixtures and fittings with the premises you should check there is an inventory attached to the lease and that it is correct;
5. When negotiating the term of the lease you should always ask for an option for a new lease so that you get say a three year lease with an option for another three years. Without the option you may not be able to sell the business as the original term nears the expiry date or the landlord may grant you a new lease at a much higher rent;
6. You should agree on not only the rent but on how the rent will increase after each anniversary. Normal methods of increasing the rent are by way of a CPI adjustment, a fixed percentage or by agreeing on the market rent;
7. Normally, the landlord will ask you for security to ensure payment of the rent and outgoings. You should agree on this either being a cash bond (security deposit) for an amount equal to one to three months’ rent and outgoings or a bank guarantee for the same amount; and
8. Additional rules apply to retail shop leases which are leases of premises used wholly or predominantly for those retail purposes referred to in the Retail Leases Act 1994. Some points to note are:
(a) A retail shop lease under the Act must be for at least 5 years (including any option) unless the tenant provides the landlord with a section 16 certificate from a lawyer which allows a shorter term;
(b) At least 7 days before the retail shop lease begins the landlord must give the tenant a Lessor’s Disclosure Statement containing important information about the shop and the lease. Failure to do so will entitle the tenant to terminate the lease.You need to check the Statement is correct and provide the landlord with a Lessee’s Disclosure Statement in response within a further 7 days;
(c) Apart from certain exceptions, the landlord is not allowed to claim lease preparation costs from the tenant but the tenant has to pay the fee for the registration of the lease at Land & Property Information; and
(d) Security deposits must be deposited with the NSW Retail Bond Scheme and the landlord cannot refuse to allow the tenant to provide a bank guarantee instead of a security deposit.