Millennials are known as the entrepreneurial generation.
While previous generations have prided themselves on maintaining job security, a stable income and working up to executive-level positions, unlike any generation before them, Millennials place a high value on independence.
We are wary of working in stagnant jobs with little variety or flexibility. After, perhaps, observing family and friends toiling in unfulfilling roles in a fluorescent-lit cubicle (nb: no one looks good in fluorescent light), we want to innovate by breaking the traditional career mould.
We crave the occupational freedom to create something meaningful and unique. In a recent study of Millennials in the workplace undertaken by Bentley University, 67% of surveyed participants described their career goals as starting their own business.
One of the most important criteria for establishing a successful business is to set it up the right way, in accordance with relevant legislation in your state or territory.
Say you have an amazing business idea to open your own boutique cafe! You have found excellent premises to open up shop and all that stands in the way of your thriving new venture is your landlord, and negotiating a favourable commercial lease for the premises.
The following tips will help you prepare for your meeting with your new landlord or leasing agent and put you in a position to confidently negotiate your new lease.
Do your homework. What are the rental costs like in the area of the premises you wish to rent?
It is handy to work on a costs per square metre basis.
Keep in mind that GST will usually be payable on top of rent.
2. Rent Review
A Rent Review is either of the following options (or sometimes a combination of them):
- Consumer Price Index Increase – CPI reviews are usually carried out once per year;
- Fixed percentage increase (for example, 4% each year); or
- Market review – ensures the rent you pay is consistent with current market rates. Market rent reviews are based on the rent paid by tenants in similar properties in the surrounding area and influenced by demand for similar properties. These reviews can be carried out by your landlord, a property valuer or estate agent.
From the perspective of your landlord, the rent review is an integral element of your commercial lease. It means that your rent will be reviewed at specified intervals and makes sure that your rent aligns with current market rates.
Make sure you aren’t paying too much. Over the course of a five-year lease, fixed price increases of 5% a year can see your rent increase 25% over the term of your lease.
3. Term Of The Lease
The length of your lease agreement is something you will need to negotiate with your new landlord. You may wish to sign a long-term lease to secure your premises, however, there are advantages and disadvantages with this approach.
One of the main benefits of a long-term lease is that it provides you with security, the ability to build up your business and to make it a saleable asset.
A potential disadvantage is that if the term of your lease is too long, and you expand your business, you may outgrow your premises.
Write a business plan so that you are confident of where you want your business to be in 5 years time. Is the current location temporary until you can find the capital to expand? Or do you have plans to develop the business operations from the same location?
By asking yourself these simple questions you can be sure that the length of your commercial lease is right for your circumstances.
4. Will You Need To Fit-Out The Premises?
Do you need to provide the necessary equipment to run your business from the premises, such as final decorations or fittings? If so, what is it likely to cost?
Sometimes your landlord will either pay for the fit-out or provide a combination of a lease incentive payment and/or rent-free period to assist with the costs of your fit-out. The most common lease incentive is a contribution by a landlord to whole or part of a tenant’s cost of fitting out of the premises or the provision of a rent-free holiday or a rent discount period.
Make sure you consider these hidden costs and ask your landlord for a lease incentive payment and rent-free period.
5. Permitted Use Of The Premises
When negotiating your lease agreement you should be aware of your proposed use of the premises.
Negotiate your permitted use to be as broad as possible to account for the fact that in the future your business may diversify, or you may want to sublease some of your space.
Without a broad permitted use of your premises, this may not be possible unless the lease is varied.
6. Assignment And Subletting
It is important to ensure that your lease allows you to sell your business and assign the lease. Assigning your lease means that all rights you have over your premises may be transferred to another party. This will be important if your business expands or you wish to move premises for other reasons.
You should also make sure that your lease allows you to sublease part of your premises. Subletting allows you to lease all or part or your premises to a third party, rather than your landlord, during a period of the unexpired balance of your term of occupancy in the premises.
Most landlords will allow this, subject to several conditions.
7. What Are The Outgoings/Operating Expenses?
The reference to ‘outgoings’ in a commercial lease usually refers to increases in taxes and rates that may include the running of the physical building where your premises are located. Generally you will not be responsible for paying outgoings, unless this is specified in the lease agreement.
If your landlord is passing on the outgoings (or operating costs) to you, and is charging separately for these services, negotiate a fixed-fee or cap on the amount.
Also, make sure your landlord is transparent and discloses these expenses to you before you enter into the lease.
8. Alterations Or Improvements
Most leases state that a tenant cannot make any changes or improvements to the premises without your landlord’s approval.
While sometimes a landlord’s approval is a formality, the approval is still conditional and subject to your acceptance that:
- all work is undertaken by a licensed and approved contractor
- you must extend your own insurance to cover all improvements
- you agree to make restitution for any damage incurred when removing the improvements (if mutually agreed – to restore the property to its previous condition).
What happens with the improvements at the end of your tenancy should be clearly documented and understood by you and your landlord.
Ask for a clause that gives you permission to complete particular work, for example, if you require a fit-out of the premises with your landlord’s consent.
9. Make Good And Refurbishment
A make good clause is common for commercial lease agreements. It requires you to make sure that the premises are returned to your landlord in the condition you found them.
Some leases only say that you must return the premises in the condition they were in at the start of the lease. Other leases can be onerous and impose redecoration obligations that extend to re-painting and re-carpeting premises.
Make good clauses can have some hidden lurks, so it is important to carefully check the terms of your lease agreement and raise anything you are concerned about with your landlord prior to signing.
When negotiating your lease agreement, make it clear who will pay the lease preparation costs.
Ideally, each party should bear their own costs. In the case of a retail lease, Retail Lease Legislation in each state and territory prohibits your landlord from passing on these costs to you.
There is no such restriction in commercial leases, and all prospective tenants should be aware of this.
Like most things in life, starting your own business is not hard when you know how.
Branching out on your own entrepreneurial venture is less daunting when you understand how to avoid potentially costly pitfalls and where to find professional help.
Renting a commercial property is a business transaction, and you should make the decision to enter a commercial lease agreement carefully and with professional assistance. The cost of your business lease is likely to be one of the biggest overheads you have.
Have you started, or dream of starting, your own business? Tell us about your startup experiences in the comments section below!
To get in touch with a legal professional specialising in commercial leases visit:
- LegalVision; or
- Ph: 1300 544 755