Whether you operate a trade or construction business, provide professional services, or sell goods to consumers, at some point in your business’s lifecycle you will probably need a factory, commercial office space, or retail shop to trade from.

For most people, their first step into establishing a business premises is to enter into a lease and rent one. As the business evolves, tenants often turn into landlords and buy their own premises. However, even if ownership is your end goal, it is important that you take seriously the task of understanding your rights and obligations before signing a lease.

Here is a list of important things to consider from the outset.

Review the heads of agreement or lease proposal carefully

You will usually be asked to sign a heads of agreement or lease proposal that contains the commercial terms you have agreed to with the landlord before a formal lease is prepared. Make sure you read this document carefully and confirm that you agree to those terms. It is uncommon for a landlord to agree to changes once a heads of agreement or lease proposal is signed, so if you want to negotiate anything in particular, you should try to do it at the start and make sure it is recorded in writing.

Understand the full cost, not just the rent

Get an estimate of what costs you will have to pay in addition to your rent. For example, most leases require the tenant to make a contribution to outgoings, which can include council rates, water rates, insurance costs, strata levies, and more. Some leases require the tenant to pay a percentage share of outgoings, while others require the tenant to pay 100% or nothing at all. Either way, it is important that you consider more than just the headline rent figure.

Know who is responsible for maintenance and repairs

It is important to understand who is responsible for maintenance, service, and repair of the premises. Generally speaking, a tenant is ordinarily responsible for general maintenance, upkeep, and fixing any damage they cause, whereas a landlord is responsible for repairs or replacement of a capital nature.

For example, a tenant will often be required to service an air conditioning system at their own cost on a regular basis. However, if a full replacement or significant repair is required, this will typically be the responsibility of the landlord. Each lease differs, so you need to check.

Common items that tenants may be responsible for maintaining and servicing include air conditioning units, roller doors and shutters, grease traps, and fire safety systems, including yearly certification.

Budget for upfront costs

Be prepared to pay some upfront rent (usually a month in advance) and provide a security bond (usually three or six months’ rent) or a bank guarantee equal to the same amount. If you are providing a bank guarantee instead of a cash bond, you will need to make an application to your bank. This process can take one to two weeks, so it is worth starting early to avoid delays.

Arrange your insurance early

You will be required to provide evidence of your insurance for public liability and any other cover required under the lease (for example, plate glass insurance) at the commencement of the lease. If you engage an insurance broker, you can usually arrange a policy that complies with the lease requirements fairly quickly, but again, it is best to start this conversation early.

Understand your makegood obligations

What state do you need to leave the premises in at the end of the lease? Tenants often overlook this question because they are focused on getting into the premises and starting to trade. However, makegood obligations can be significant.

It is common at the end of a lease for a tenant to be required to remove their fitout (for example, partitions, joinery, cabinetry, and other installations) and repair any damage caused as a result of removal. There may also be a redecoration clause requiring painting, restoration of surfaces such as floors and walls, or a “bare shell” requirement. A bare shell clause requires the tenant to strip out the premises, remove fixed floor coverings and installations, and return the space as a blank canvas ready for the next tenant to fit out.

Makegood and redecoration requirements are often expensive, and you need to budget for them from the beginning.

Other considerations

The items above are not an exhaustive list of everything you need to think about before renting a business premises. There are other important considerations, including the amount of rent, how often it is paid, when it increases and by how much, how long the lease runs for, whether you have an option to renew, and a range of other matters specific to your situation.

How we can help

Our team works with tenants and landlords every day to help them navigate the leasing process and the ongoing relationship between the parties. With more than 40 years of experience advising Penrith businesses and property owners, we understand what matters most when it comes to protecting your interests in a commercial lease.

If you are considering leasing a business premises, or if you have questions about an existing lease, contact our experienced property law team to discuss your situation.