February 23, 2021 - National Retail Group

Ten Questions To Ask Before You Sign Commercial Property Lease

Before you sign a commercial property lease, it is important that you feel comfortable making the commitment on paper. Entering into a commercial lease for small warehouse for rent or business property for rent is a major milestone and you will need to ensure that you can sustain the arrangement for the duration of the lease. Remember to ask questions, check the terms of the lease, ensure that the property you want to lease aligns to your business strategy and that you can operate your business comfortably.

Whether you are renting medical rooms for lease, commercial shop for lease, office for lease or child care property for lease, you will need to conduct research, perform due diligence and check that you are making the right decision. You will need to consult with your team, speak to advisors, check your budget and ensure that the premises will help support your business and its growth. Before you sign a commercial property lease, here are 10 questions that you should ask. You can direct these questions to the real estate agent, your advisors, your business team and your family. These questions are not exhaustive and represent the most common questions that we hear.

How old is the commercial property?

The age of the commercial property will help to provide insights into whether unexpected costs may arise in the future. It is important to check what the lease says in relation to repairs and upkeep. The older the property, the more issues that might be experienced in the future. While the rental amount might be relatively lower, unnecessary headache can arise during the lease. Depending on the size and complexity of the property you are leasing, make sure you understand the space you are leasing and who is responsible for repairs to the property and common property. Your business needs to operate from a reliable setting so make sure the age of the property does not affect the day-to-day operations of your business.

How long has the property been owned by the landlord?

Tenants want certainty that the property that they are leasing has been owned by a landlord who is committed, invested and reliable. There is a risk that the landlord may not have funds to service their mortgage or to conduct repairs that are the landlord’s responsibility. If the property has been through a few owners, this might suggest that the landlord might not be committed to their investment. This should be a red flag and tenants should ask questions about the reasons so they can make an informed decision.

What’s the rent and can it be increased?

The rental amount can be a significant expense for a business. It is important to understand how the rent is calculated and whether it can be increased. Usually rent increase clauses are common and may be aligned to CPI or some other metric. As a tenant, you want to understand your rights to dispute rent increases that have not been calculated correctly or are unfair. Ensure that you review any notice periods and check whether options to extend lease terms include automatic rent increases.

How long is the lease?

This is a question that we believe is very important. Often tenants forget to enquire about the length of the lease. Moving your business from one location to another is challenging, but tenants also want flexibility to exit the lease without too much notice and penalties if they want to pivot their business strategy. Understanding the length of lease, options to renew and notice periods to terminate are crucial from a business planning perspective.

Can I sub-lease the property?

Sub-leasing the property is often prohibited. However, tenants can negotiate clauses into commercial property leases to permit this conduct. It is important to check what rights you have and to be transparent to the landlord about your activities to set expectations. Usually the landlord will expect written notice in advance and will require written confirmation before the sub-lease can proceed. The landlord may also request a copy of the sub-lease, including details of the sub-lessee, so that they feel comfortable with the arrangement.

Are there any restrictions on using the property?

This is an important question when it comes to businesses undergoing activities that might not be expected by the landlord. Commercial properties may have restrictions set by the landlord, Australian local council, Government authority or professional body. For example, you may need a permit to seat a certain number of people in a restaurant. Or, you may need a licence to conduct particular activities on the land. You should check what restrictions exist to ensure that you business can operate at the commercial property without disruption.

What are the outgoings per month?

The value of monthly outgoings will need to be understood to help you set your budget. Otherwise, you may not be able to service the commercial property in a timely manner. Outgoings include council rates, permits, utility fees, telecommunication costs and others. Check the lease to see what outgoings are the responsibility of the tenant. Factor in increases to fees as they are unlikely to stay the same on a yearly basis.

Who pays for property improvements?

Property improvements is a common topic for dispute between tenants and landlords. Often the commercial property provided to tenants is the shell of the premises. Tenants will want to make improvements to help tailor the commercial space to suit their business. Landlords may restrict particular improvements or suggest that the improvement costs be borne by the tenant. Check the lease terms to understand what is expected so that you can budget costs into your assessment of the commercial property.

Who is responsible for insurance?

All commercial properties need to be insured to protect you if something goes wrong. It is important to check the lease terms to understand your rights and obligations. Depending on the lease, insurance may be borne by the landlord or tenant. The lease may specify insurance amount thresholds that need to be satisfied and the landlord may request that they are listed as a beneficiary under the insurance policy. Whatever the arrangements, it may be wise to consult an insurance specialist to ensure you obtain the right level of insurance cover.

Does the landlord plan to sell the property?

If the landlord plans to sell the property, this may be a red flag. Often the commercial lease will not be affected if the property is sold. However, the new owner may have different intentions or not treat you in the same way. While it is difficult to forecast a change in the landlord’s circumstances, if you know that a sale is pending it might be best to steer clear of the commercial property because there is a continuity risk.

At National Retail Group, we manage a wide range of commercial properties for lease. We service the childcare, medical, retail, manufacturing and professional service industries. Whether you are after a warehouse, office, shop, or other commercial property space, we can help you find the right place to conduct your business. To speak confidentially about your circumstances, or to request an inspection of the properties that we manage, please contact us on 1800 413 986.

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