Tenants: how to avoid lease pitfalls before you sign on the dotted line
It is important for prospective tenants to review the lease documentation prior to signing.
Some of the issues tenants should be aware of include:
- The suitability of the premises and whether they can conduct their business from the premises;
- Whether the permitted use, term and further terms are adequate for their future plans;
- Whether planning permits, approvals or consents are required from local council or other authorities;
- If they are proposing a fit out or signage whether the Landlord approves these works;
- Whether they are required to obtain certain insurances and if so, are the insurances appropriate;
- How is rent is to be adjusted during the term and further terms;
- What are the total occupancy costs and have they been budgeted? If the premises is subject to the Retail Leases Act 2003, has a Disclosure Statement been provided. This document sets out the outgoings to be sought by a landlord.
- Whether a security deposit/bank guarantee needs to be provided and whether the amount is appropriate;
- Whether a personal guarantee is to be provided;
- Whether the property is subject to a mortgage. If so, mortgagee’s consent should be obtained;
- What the make good obligations are;
- What will constitute a default of the lease (apart from the non payment of rent) and whether the Landlord can terminate the lease early if they wish to redevelop the property;
- Whether the Landlord can relocate the tenancy (which is quite common in shopping centre leases);
- Whether the proposed entity/structure of the Tenant is the best structure for the new or ongoing business. Prior to signing the lease is a perfect time for a structure tune up.
The above is not a comprehensive checklist but just some of the issues which need to be considered.
An example of when things can go wrong is a tenant who sought advice after a lease was executed. The lease contained a 5 year term for use of the premises as a café. The tenant wished to expand the use of the premises to include a nightclub. The permitted use provided that the premises could only be used as “a café only”. The landlord refused to give permission to amend the lease to allow the permitted use to include a nightclub. Had the Tenant carefully read the restrictions in the lease (and obtained advice prior to signing) the permitted use may have been able to be negotiated to include a nightclub use.
