How to avoid a dispute!
Are you wondering, ‘Should I bother having someone review my Lease before I sign it?’ My answer?
Yes! It’s absolutely worth the investment in time and money to have the lease for your business premises reviewed. Whether it’s the first Lease you are entering into or the thirtieth Lease, you will receive value from properly understanding the hidden risks and costs of the Lease you are entering in to.
When negotiating (or re-negotiating) a Lease there are potential hidden risks that can get expensive if you don’t consider them up-front.
In life, and in property sometimes things do not go according to plan! Having a water-tight lease it can save time, money and sleepless nights. Ending up in a dispute that leads to litigation can end up being a big waste of energy, time and money.
Renting a premises is often considered a desirable option for running a business, it can be cost effective and flexible, so to keep the balance in your favour I have set out some of the key areas that you should consider when sourcing a new premises or if you are entering into a new lease:
The FIVE Reasons You Should Get Your Lease Agreement Reviewed:
1.Understand the Implications of Lease Incentives and ‘Face Rent’
Sometimes Landlords offer incentives such as an introductory rent discount for a specified period to entice a prospective tenant to sign an agreement. On face value, this can seem like a great deal for you (as the potential tenant).
However, buyer beware! These inducements, along with financial incentives to fit out the premises can often end up costing you more in the long run. Landlords are in the business of making a profit and will often attempt to recoup these upfront discounts via inflated rent (‘face rent’) over the duration of the Lease.
While it can seem appealing to “save” some money upfront – these types of incentives frequently have convoluted and tricky clauses with unexpected consequences. A Lease with a simple rental structure is often better over the longer term
TIP: Clarify with the Landlord (in writing) who is responsible for reasonable service costs. In a building with multiple tenants, the landlord may pass on costs for air conditioning, cleaning and maintenance – make sure you know this on the way in rather than being surprised by it later.
2.”Market Rent” Reviews Can Mean You Get Trapped Paying Higher Rent
Like “face rent”, agreements with “market rent” review clauses should also be treated cautiously. These clauses come into effect at certain times during a Lease and the issue is “market rent” (aka the “going market rate”) can be whatever the landlord nominates, the tenant is then taken to have automatically accepted the review UNLESS its challenged within a certain time frame.
The problem with these types of clauses is that a simple administrative oversight – such as not challenging within the required timeframe – can automatically lock you into an additional lease term on undesirable terms i.e. higher rent. I have seen several people end up in this situation and the cost and process to rectify causes headaches all round.
TIP: Check all clauses with a fine tooth comb to make sure there are no automatic rent increases, these can be sometimes tricky to decipher as the language used is not always clear.
3.Unclear “Make Good” Obligations Can Cost Thousands
Usually, at the end of a lease tenants of commercial premises are obligated to return the premises to the condition they found it when they commence occupation of the property, this in some cases can include removing fit-outs and fittings. For the most part this sounds reasonable, however, there are some aspects of these clauses which you should pay particular attention to, here are four:
|Tenant deemed to be “holding over” if they fail to satisfy the make good clause.||If you vacate the premises and for whatever reason, the landlord considers that the make good clause hasn’t been complied with – as the former tenant you may be deemed to be “holding over” the premises or retaining possession even after termination of the lease. As a result, the landlord may continue to charge you full rent until a new tenant is found; even for immaterial items.|
|Issues with sub-letting||If you were to sublet your premises during the period of the lease, you could be caught out when it comes time to turn the premises back over to the landlord, if you haven’t left enough time to meet your obligation to “make good” before the lease ends.|
|Structural Soundness and Waterproofing||Most commercial leases do not require the landlord to keep the premises structurally sound and waterproofed. This can cause a multitude of issues if the building has one or both of these issues. It can make repairs a time-consuming and challenging process; with a lot of toing and froing. Not to mention the costs associated!!!|
|Repairs and Maintenance||The party responsible for ‘repairs’ and ‘maintenance’ is determined by interpreting the lease. But defining what a ‘repair’ is and what is ‘maintenance’ can be much trickier than you might think.|
Paying close attention to these clauses is critical as ‘make good’ is the number one cause of disputes between landlords and tenants.
4.Not Getting a Property Inspection Before Signing the Lease
An essential step in the process is to get a third-party assessment of the premises PRIOR to the Lease being signed – and getting both tenant and landlord to sign off on it. This will flag any repair issues from the outset. You can also request certain aspects are not included as part of the Lease – i.e. the roof – which will then fall to the responsibility of the landlord should any repairs be needed.
TIP: A report on the condition of the property should then be attached to the lease as a record at the time of the commencement of the lease to mitigate potential dispute.
It is in your interests to ALWAYS have very clear clauses which outline the obligations relating to repairs and maintenance, because waiting until something goes wrong just makes for lengthy and costly delays in repairs and impact on your day to day business operations.
5.An Expert, Independent Pair of Eyes
Working with an expert provides:
- new ideas
- ensures best practice; and
Having an independent pair of eyes review your Lease will shed a new light on the Lease for you. I recommend both parties seek their own legal advice – those entering into the lease and the landlord. It provides an expert independent pair of eyes, and items may be identified that can save you a lot of money over the period of years that the Lease is for. It also means each side is working towards a mutually beneficial arrangement, rather than one party having the arrangement more in their favour.
When negotiating (or re-negotiating) a Lease there are potential hidden risks that can get expensive if you don’t consider them up-front. Having a lawyer review your lease means they may pick up on things you don’t see or haven’t considered. It’s like people who try to self-diagnose their symptoms – we as humans are never quite as objective about our situation as someone else is.
So, Why Are Leases Written in Such Convoluted Language?
Excellent question – leases like all legal documents tend to be wordy and are a combination of years of legal doctrine and formality. While we are in favour of moving towards a more plain English, straight-forward style of legal writing, not all lawyers are the same. So remember a lease presented to you by a landlord will always be written in the best interests of the landlord – to minimise THEIR own risk, probably as advised by THEIR lawyer. During the negotiation phase, the devil is often in the detail, or what is not written, or is written but in a wayl that is not immediately understood.
Different States have different laws when it comes to leases and I have seen instances where rent increases have forced people out of business, or the inability to grow due to restrictive sub-letting clauses. While in the early stages you might not be sure how much or how quickly you might grow, 3-4 years down the track it might be a real possibility and being stuck in a restrictive agreement can cause multiple problems.
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