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Buying or starting a business is probably one of the most life-changing and significant ventures you’ll undertake in your life. It’s up there with buying your first home, having your first child, getting married or getting divorced. It’s really hard work. But when you find the right site and you can visualise yourself, your staff and clients operating in that space, it’s pretty thrilling. After the initial transition into the new premises, when you begin to find your groove and your business begins to thrive, it makes all the effort you put into searching for the right site worth it. But what if your business changes? Or you change? Or you want to expand or sell? Does the lease agreement you signed all those months, or even years ago, accommodate that?
What tends to happen sometimes is that people get caught up in the excitement, or anxious anticipation, or ‘over it’ mindset of finding the ‘perfect site’ that they neglect to do just as much due diligence with the actual terms of the lease.
Recently, we’ve been receiving more enquiries than usual from medical professionals asking for advice on their lease due to issues they’re having midway through the agreement. The issues range from problems with the location, the actual site, the body corporate, the terms of the agreement or even the landlord. It’s not just medical professionals who find themselves in this situation. Business owners generally don’t exercise the caution required before the lease is signed and don’t realise the risks until they’re months or years into their tenancy. As I mentioned in my previous blog, negotiations are very difficult if not impossible at this stage of the lease.
While the industry is making some progress in having contracts written in plain English and being easier to understand, just remember, lease agreements are legal documents and will contain a number of terms and phrases that are not widely used outside of the legal and commercial tenancy industry.
Some common terms and conditions that you need to look out for in a lease agreement.
If you are confident to negotiate the terms yourself, here are a few areas I strongly recommend you consider before you commence.
This seems like a really obvious one but this step involves much more than finding a location with great exposure and high foot traffic. It’s also extremely time consuming and will be a day in day out exercise requiring a lot of expertise and discretion.
The site you’re considering may be occupied by a competitor, or the agent could know your current landlord or boss. If they knew you were looking to take over the site, would that have an impact on your own business?
What’s the implication of your current leasing agent knowing your circumstances? If there’s plentiful supply of sites that are right for your practice, this may put you in a better position to re-negotiate terms with your current landlord – or not if suitable sites are scarce.
Does the vendor of the prospective site know your circumstances? If they know they have the only available site that meets your requirements, your bargaining power is greatly diminished.
I’ve also found some business owners are too narrow with the search and miss opportunities in neighbouring suburbs. Additionally, they’ll go for sites that are larger – or in some cases smaller – than what they actually need. Does the site allow for your business to grow and expand? What are your blind spots?
My recommendation is to outsource this process to an expert so you can focus on your customers through the transition.
Most of our clients are engaging in expensive, specialists fit outs with the intent to stay at the current location for long periods of time. A development clause is often inserted by the vendor to allow them to sell or develop the site should it present as a lucrative option or when they can make a high margin on a sale.
For your own protection, it’s best to have this clause removed at least for the first term (if not two terms) to ensure you’re not forced out of the premises after you’ve invested a lot of cash in a fit-out and time building your profile. Alternatively, you can negotiate compensation for relocation costs, loss of business and goodwill, and a financial contribution to the fit-out at the new premises.
Assigning the lease means the lease is taken on by another party. This is an alternative to ending a lease before the agreed duration of tenancy for which you are financially liable. You may need to do this if you decide to sell your business or can no longer keep operating. If this is the case, you will need the permission of the landlord to make sure your lease states they cannot unreasonably withhold their consent. This is very important if you are looking at a ‘scale and sell’ business model.
Similarly, if you sub-let part or all of your premises, you are still liable for the lease until the end of the term. This means you must pay the full rent even if your incoming tenant fails to pay. It is important to undertake a credit check and ensure that the incoming tenant is able to meet the lease requirements.
Keep in mind if you are assigning a lease or sub-letting, you may be required to pay the landlord’s reasonable legal costs and other associated expenses.
With many older residential or heritage properties being converted into medical and health centres, veterinary clinics or dental practices, we are often seeing these buildings begin to deteriorate and become unsafe. The maintenance and general upkeep of these ageing buildings requires significant investment that, in some cases, the landlord is reluctant to provide.
If your lease is negotiated properly, the landlord is responsible for the structure of the building and major capital items (i.e. roof, walls, air-conditioner, exterior fittings such as gutters and downpipes, plant and equipment that is the property of the landlord, etc). If your building is not compliant with state government legislation, the lessor could be in breach. Obtaining an independent building inspection will help you understand the severity of the issues so you can enforce renovation, maintenance or possibly renegotiate your lease.
Leasing agents work hard to get a result and are commission-based operators just like sales agents which is why a Heads of Agreement comes in handy. A Heads of Agreement document is drafted for review prior to the lease agreement so both parties can review the terms. It is usually non-binding and is like an overview of the key terms that are set out in the actual contract. Always run the Heads of Agreement past your solicitor before signing and ensure they are not trying to lock you in at this early stage with a non-refundable deposit.
Just like you wouldn’t recommend your clients treat their health and medical issues without proper advice, we at 1Group would always recommend you get the right advice and support from a trusted adviser or tenant representative before you accept a long-term lease agreement. Get in touch with us to find out how we can negotiate the right terms on your behalf to mitigate risk and optimise margins, while keeping your profile confidential until the time is right.
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