Posted Wednesday 4th October 2017

Top Risks in leasing for Tenants

Office leases have a reputation for being a standard document.  However, for many small businesses (and even some medium sized businesses) entering a lease is both the largest and longest single obligation they enter into.  Most business owners take the time to find the right location that is functional and offers room to potentially expand their operations, however many fail to make sure the lease is also right for the business survival. For this alone they deserve more respect.

What should be a red flag to most potential tenants, is that governments in most states have enacted legislation that imposes strict disclosure requirements in relation to retail leases and requires tenants to obtain a certificate from their legal and financial advisors to demonstrate that they have been advised in relation to?
There is a tendency of the business owner to simply look at the basic terms of the lease, such as monthly rent requirements, values of discounts offered and minimum term, and not to look further into other terms such as notice periods, sub-lease or make-good arrangements. 

To simply meet the government requirements, many tenants persist in seeking a  “sign-off” meeting with a lawyer, without taking the time to fully understand the terms of the lease and to work through the scenarios that may eventuate from other key terms of the lease with their trusted legal advisor.  This leaves the tenants with little understanding or protection if things go wrong. 

Remember, leases are like any other contract and the lease can always be negotiated to ensure that low risk terms are agreed between the landlord and the tenant. The devil, as always, is in the detail.
Some key risks that Chilli Law highlight with our clients:

  • The draft lease will often differ (whether by accident or design) in some important respects from the letter of intent/lease offer.  Some examples that we have seen involve:
    • negotiated option term not included in the final lease;
    • signage rights discussed with the agent missing;
    • outgoings payable in addition to rent, instead of being included in the rent; and
    • promised storage areas or car parks not included.
  • The permitted use set out in the lease is not wide enough to cover all of the initial and future activities of the tenant (for example where a tenant has a future plan to seek a liquor licence to enable their café to sell alcohol).  Alternatively, if a specialist business in a shopping centre does not have exclusivity for its permitted use other tenants may be permitted to offer the same goods or services.
  • Rent being charged on a set (and not per square metre) basis where the premises are still under construction.  In many cases, the final surveyed area of the premises can be significantly less than initially offered, yet the tenant will often not have a right to terminate or reduce the rent payable. 
  • Risk is unbalanced.  Typically, the landlord seeks an indemnity and release to cover any claims made against them or loss that they suffer.  However, these clauses are sometimes so broad that they even cover losses that have been directly caused by the negligence of the landlord. You should not be willing to cover the landlord for the cost their negligence and your loss.  
  • Additional costs may be payable by the tenant which may not have been considered during negotiations, such as the tenant paying for the landlord’s legal costs, promotions levies, costs of mortgagee consent, survey plan preparation, air-conditioning maintenance installation of meters (for water and electricity) etc.  Overall, these can be costly and significantly alter the commercial reality of to the lease.
  • Ownership of fitout.  In many cases, the tenant may believe that they own the fitout in the premises and take it with them upon ceasing in the premises.  However, given the principle at law that anything “affixed” to the land becomes part of the land, this is anything but clear cut.
  • The lease may include other matters that may significantly affect the tenant’s decision, such as clauses that permit the landlord to relocate the premises within the building/centre or to terminate the lease where the landlord proposes to redevelop the building/centre.

The above is not an exhaustive list, but does illustrate the value of proper legal advice that seeks to make sure that the lease suits the nature of your business and its needs, the specifics of the transaction, and to seek a shared understanding of all the benefits and risks of the lease  from a practical perspective.

Tags: Leasing

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