5 Things to Think about before signing a Lease

"David Balwin

CPA | Business Advisor

The Retail Shop Leases Act 1994 (Australia) requires prospective lessees or assignees who lease less than five retail establishments in Australia (as at the date of the report) to obtain a Financial Advice Report to be completed by an accountant in accordance with Australian Auditing Standard AUS 904 Engagement to Perform Agreed-Upon Procedures (Corporations Act 2001)

In my experience in providing these reports, here are the top 5 things I notice lessees either do not understand nor realize the potential impact of not getting them clarified upfront.

  1. Ensuring that the clause setting out what business can be conducted at the premises is sufficiently broad enough to allow you to undertake any expansion you may have in mind for your business.  I generally prefer to see this as broad as possible in relation to the type of business you intend to run from the premises.
  2. Ensure that you fully understand what the rent/lease cost covers, eg, does it include outgoings and if so what outgoings.  Also what other costs will you be liable for under the lease, eg, painting the premises at the end of the lease or restoring changes to the premises back to the original state.
  3. Lessors normally hold the lessee responsible for the maintenance of the premises and the lessor for capital expenditure.  Therefore, make sure you take photos of the premises before you move in so that if there is a dispute you can clearly show the state of the premises at the time of entering into the lease.
  4. Be clear if the lease is for a period of time (eg 3 years) with an option to extend for an additional period (usually the same length of time) that you understand exactly what your obligations are in terms of advising the lessor of your intention to take up the extension or not.  Many leases state a specific point such as “no later than three months prior to end of the period of lease”.  Failure to comply with this timeframe gives the lessor the right to refuse to extend the lease which could lead to you having to find alternative premises in a very short time frame and go through the process of advising clients etc of the move.
  5. Fully understanding the consequences of breaking the lease and what liabilities you will incur in doing so.  Depending upon your circumstances and future plans you may be better taking a 3 year lease with an option to extend another 3 years  rather than a 5 years lease with the option to extend a further five years or vice versa.

Wherever possible it is far better to get things clarified and changed in the original lease than trying to negotiate amendments to the lease at a later stage where you are at a significant disadvantage from a negotiating perspective.

Balanix Solutions Business Advisory