Entering into a commercial lease agreement is a significant step for any business owner. Whether you're a startup or an established company, the terms of your lease can greatly impact your operations and bottom line.
However, many entrepreneurs make critical mistakes during this process that can lead to costly consequences down the road. In this article, we'll explore some of the common pitfalls to avoid when entering a commercial lease.
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Not Reading the Lease Thoroughly
One of the most crucial mistakes business owners make when entering into a commercial lease is not thoroughly reading the document.
It's easy to skim through the terms and sign on the dotted line, especially when you're eager to secure a space for your business.
However, failing to understand the intricacies of the lease agreement can leave you vulnerable to unexpected clauses and obligations.
Commercial Lease agreements are legally binding contracts that outline the rights and responsibilities of both parties involved. Whether it be in Brisbane or greater Queensland, there is no fixed prescribed form of commercial lease contract.
This means that the party drafting the lease has very wide ambit of discretion to include imbalanced lease terms. Often these are buried and tucked away in seemingly benign areas of the lease.
By not carefully reviewing the terms, you may miss important details regarding rent increases, maintenance obligations, or lease renewal options. This oversight can lead to disputes and financial hardships down the line.
Not Seeking Legal Advice
Another common mistake is failing to get legal advice before signing a commercial lease. While it may seem like an unnecessary expense upfront, consulting with a qualified lawyer can save you significant time and money in the long run.
An experienced lawyer can review the lease agreement, identify any potential issues and negotiate on your behalf to secure favorable terms. Legal representation can also help you understand the legal jargon used in the lease and ensure that you understand your rights and obligations as a tenant.
It is important to understand how the various pieces of legislation and case law interact with your lease because the lease may not be drafted in compliance with it.
This could mean your lease says something you think enforceable, while the law overrides it to make it not so. Common areas where the lease and law can be at odds are rent reviews, obligations for capital expenses and whether certain outgoings are recoverable.
Additionally, a lawyer can advise you on regulations and laws that may impact your business operations.
An experienced leasing lawyer may even have industry knowledge specific to your type of business. Investing in professional legal guidance can provide you with peace of mind and protect your interests throughout the lease term.
Not Negotiating for Favorable Terms
Many business owners or landlords taking on substantial corporate tenants make the mistake of accepting the terms of a commercial lease without attempting to negotiate for better conditions.
Failing to negotiate can put you at a disadvantage, leaving you to take on obligations which could otherwise have been avoided, reversed or diminished.
We find that the Landlord or Tenants presenting the proposed lease expects the other party to negotiate, although would prefer they do not. This is because the commercial lease is often drafted heavily in the favour of the party presenting it.
Leases are often presented on a ‘standard’ or ‘template’ basis, to make it sound less important than it is and not worth reviewing in detail.
As noted above though, there is no ‘standard’ or prescribed form of commercial lease in Brisbane or Queensland. So, it is therefore very important for you to read and understand your lease in full.
Whether it's negotiating the rent amount, lease duration, or tenant improvements, taking an active role in the negotiation process can result in significant cost savings and benefits for your business.
Before entering into negotiations, it's essential to research comparable rental rates in the area and understand the market conditions, such as what incentives are prevailing at that point in time.
This information will help you to make informed decisions and advocate for terms that align with your business needs and budget. Remember, almost everything in a lease is negotiable, so don't be afraid to ask for concessions or amendments that work in your favor or work toward a more balanced agreement.
Not Understanding the Financial Obligations
Finally, one of the most critical mistakes business owners make is not fully understanding their financial obligations under the lease agreement.
Beyond the base rent, commercial leases often include additional costs such as maintenance fees, insurance premiums, marketing levies and common area expenses.
Failing to budget for these expenses can lead to financial strain and unexpected cash flow issues. It's essential to carefully review the lease agreement to identify all financial obligations and factor them into your budget projections.
It is so important that the Retail Shop Leases Act 1994 (Qld) requires most tenants to obtain a financial advice report from an accountant. So, keep an eye out for things like:
Marketing levies that impose an additional charge usually calculated by reference to a percentage of the rent;
Whether landlord outgoings are recoverable and if so, what type of outgoings are recoverable. Be mindful that outgoings change from time to time and many leases allow recovery of increased outgoings which can make it difficult to budget for;
How the rent is going to increase, and how often;
Whether you are obliged to undertake maintenance or repairs which should perhaps more rightfully rest with the other party; and
Whether each party pays their own legal costs for preparation, negotiation and execution of the Lease.
Review the terms of the proposed lease and understand the Premises you are going to lease. Remember that not all financial impacts are obvious or easily calculable.
For example, be mindful of who pays for essential services and equipment if they break down, such as air-conditioning.
It may sound easy to remedy but in the ‘Sunshine State’ of Queensland operating without air-conditioning services can be detrimental to customer flow and staff comfort.
So, it is important to understand how downtime of essential services is to be handled – who undertakes repairs, how quickly and at whose cost?
Be sure to clarify any ambiguous terms with the other party and seek clarification on how expenses are calculated and billed. Additionally, consider negotiating caps or limits on certain expenses to mitigate financial risks and uncertainties.
How These Mistakes Can Impact Your Business
The consequences of these common mistakes can be severe and far-reaching for your business. Failing to read the lease thoroughly or seek legal advice can result in unfavorable terms that limit your flexibility and hinder your ability to grow.
Similarly, not negotiating for favorable terms or understanding your financial obligations can lead to increased costs and financial instability.
Disputes with landlords or tenants, unexpected expenses, and lease violations can be disruptive and damage your reputation. In some cases, these issues can even lead to eviction or legal action, putting your business at risk of closure.
By avoiding these mistakes and taking a proactive approach to the leasing process, you can protect your assets and set yourself up for success.
Conclusion
Entering into a commercial lease agreement is a significant decision that requires careful consideration and attention to detail.
By avoiding common mistakes such as not reading the lease thoroughly, failing to seek legal advice, not negotiating for favorable terms, and not understanding the financial obligations, you can mitigate risks and position your business for long-term success.
Remember to approach the leasing process with diligence and foresight, and don't hesitate to seek professional guidance when needed.
By doing so, you can secure a lease agreement that meets your business needs and enables growth and prosperity.