If you’re planning to purchase a business servicing the hospitality industry, locale is crucial to your new investment and once you’ve found the ideal location it’s necessary to understand the terms of a commercial lease.
Commercial leases refer to an agreement between a landlord and a business outlining the terms and conditions of business property rental. Unlike residential leases where families sign half-yearly or yearly agreements, hospitality business owners can negotiate their leases to range anywhere between 5 and 20 years.
Before entering a lease negotiation, these are the important issues you need to consider.
Term of lease and renewals: Landlords prefer long-term tenants, so it may be easier to negotiate a better deal for a longer lease. However, if you don’t feel comfortable taking on a 15-year lease agreement don’t be afraid to put your offers on the table. It’s also advisable to negotiate any options to renew the lease and the terms relating to that renewal.
Rent and rent reviews: The first to thing to evaluate is cost. Rent can certainly be negotiated, as well as a cap on the percentage increase to avoid costs later when the rent goes up. It is recommended that the basis of reviews be negotiated into the terms and conditions of your contract.
Hidden costs: Outgoings are not generally included in the rent as there are no regulations to have them specified. These costs may include council rates, strata levies, security, and rubbish removal. The landlord should be able to provide an outgoings estimate for you to review and calculate the total cost of rent.
Security bond: In Australia there are no legislative requirements for a business to give a bond under a commercial lease, but most landlords include it in the agreement. The amount, withholding and repayment of the bond is negotiated; ensure you specify when the bond must be returned and under what circumstances.
Maintenance and improvements: Your hospitality business will require constant maintenance, so your lease should clearly set out who is responsible for the costs. As your clientele base grows for your operation, you will need to accommodate growth and look at alterations, but in most cases tenants are not permitted to make changes. Ask for a clause that gives you permission with the landlord’s consent, and ensure it states who will pay for those alterations.
Insurance and legal fees: As with a residential property, taking out insurance is a smart choice, and as a potential tenant you can either obtain the insurance yourself or with the landlord. Recommended insurance cover includes public liability, workers compensation, plate glass window repair and general property/theft damage. When it comes to legal fees it’s common for tenants to pay the landlord’s legal fees for preparing the lease. Don’t forget you will also have your own legal fees.
Termination: The circumstances under which the lease may be terminated is highly encouraged to be set out in the agreement. It’s worth negotiating to insert an early termination clause in the event you have outgrown your location and want to get into a new one, or need to sell the business.
Right of assignment: In the event you decide to sell your hospitality business for whatever reason or you can no longer continue operating, you may need to assign the lease to another person. This will require the landlord’s permission to make sure there is a clause in your lease that states they cannot unreasonably withhold their consent.
Make sure you understand all your rights and obligations under commercial lease agreement. It’s recommended you hire a commercial property lawyer and speak to an accountant and commercial tenancy advisor to make sure you fully understand all the provisions which relate to commercial leasing for your business.