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Understanding your lease

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Last updated on March 4, 2016

A lease is a legally binding contract so understanding your lease before you sign is critical.

Before you sign a lease, consider the following issues:

Lease period

You may commit to a new lease or take over an existing lease.  Keep in mind that your banker may be unwilling to lend over a term exceeding the period of your lease.

If your lease includes an option to renew, do so in exactly the manner provided for in the lease and within the specified timeframe.

Lease payments

Determine the percentage of turnover which will be taken up by occupancy costs (target 7%-10%) and build the frequency of rental payments into your cash flow projections.

If you want to match rental payments to peaks in your cash flow or seek a rent-free period for fit-out, negotiate this up-front.

Lease clauses

Ensure that your lease can be transferred if you decide to sell the business. Be aware of the conditions under which this 'right of assignment' can occur.

An arbitration clause will give you an avenue to resolve any disagreements between you and the landlord over future rental at the time of an increase or taking up of an option.

Lease conditions

Make sure that the lease allows for the type of business you intend operating and that your use of the premises meets local council zoning requirements.

Check whether, and under what conditions, the lease allows you to sub-let all or part of the premises during the period of the lease.

Ensure that the lease is clear about who is responsible for council rates, water costs, legal fees and stamp duty.

Note that the landlord's solicitor's fees should not include 'negotiations' – they should relate solely to preparation, stamping and execution of the lease.

What to do when faced with a rental increase

Rental increases are the most common recurring problem that arise from leasing premises. The timing and amount of an increase can catch you by surprise and have an unwelcome impact on your business finances.

Things you can do include:

  • be aware of the provisions in your lease which deal with the time and method of adjustment of rental
  • budget for rent increases
  • be prepared to put forward sound and convincing arguments about the amount of any increase where it's considered excessive or likely to place undue financial stress on your business
  • seek professional advice as required
  • remember that arbitration is available to resolve any dispute that arises.
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