Many franchised businesses are conducted from premises that are leased, with either the franchisor or the franchisee holding the lease and obtaining the right to occupy the premises. So what do you need to look out for in a lease?

There is no such thing as a “standard lease” and the terms of a lease will vary depending on the landlord. Lease terms, especially the commercial terms, are negotiable and to a certain extent, the non-commercial terms can also be negotiated, especially in the case of premises that are not located in shopping centres. 

Signing a commercial lease is a huge financial commitment. It is critical that you only sign a lease containing terms you understand. It is also important that you understand your rights and obligations in relation to the lease in order to deal with any disputes that may arise.

Here are a few warning signs to assist you in recognising some of the clauses in a lease that should be looked at carefully and negotiated.

A lease for more than two years

When starting a new business, getting stuck with a long term lease can be a terrible burden for a small business owner. If you need to get out of the lease for any reason you will have to keep paying the lease payments until the landlord finds a suitable alternative tenant. While it is important to try and marry up the franchise term with the lease term, it would be much better to obtain, for example, a two year lease term with four further terms of two years than a five year lease term with one further term of five years.

The shorter the terms, the more flexibility you will have should the premises not be appropriate for the business and should things not go to plan.

Relocation and redevelopment clauses

Tenants need to understand what these clauses mean. These clauses are included in most, if not all, shopping centre leases. Importantly, where these clauses do appear in a lease, a tenant needs to ensure that it negotiates the best possible outcome should it be required to relocate.  

While the retail leasing legislation in each jurisdiction sets out the minimum requirements for clauses regarding redevelopment and relocation, these requirements are not exhaustive. For example, a redevelopment or a relocation clause should provide that on relocation, the tenant is not required to make good its existing premises.

Demolition clauses

If your lease includes a demolition clause, then you need to understand that this clause means that at any time, whether after one year or one month of entering into the lease and spending a large sum of money on a brand new fit out, that the landlord will have the right to serve you with a demolition notice requiring you to leave the premises. This will mean that you will lose your business. 

While retail legislation offers some protection in requiring landlords to pay compensation, you should still try to negotiate that the landlord cannot exercise the right under this clause for a period of time for example the first five years of the term. You should also make sure that you are suitably compensated if the landlord does serve you with a demolition notice.

Make good clauses

Tenants need to carefully review their obligations to “make good” the premises at the end of the lease term. Most tenants are anxious to obtain possession of the premises and start running their businesses and pay little regard to the make good requirements at the end of the lease. 

It is critical for tenants to have a clear understanding of their end of term obligations under the lease and the possible costs which may be incurred in meeting those obligations. 

Forfeiting legal rights

In some cases, a lease may seek to force a tenant to give up certain rights. For example, if the landlord is undertaking development works at a shopping centre the landlord may seek to include a clause preventing the tenant from making a claim against the landlord for any disruption caused by the development. These clauses should be avoided where possible.

Vague and unrestricted fees and outgoings

It is really important that you read and understand the outgoings clauses in your lease and also check the amount of outgoings and the description of outgoings in the disclosure statement.

Some landlords may try to pass on the direct costs of large common area maintenance and repairs to the tenant, or the costs of managing the property, or the costs of maintaining essential safety measures. These are just some costs that a tenant should seek to remove from the description of outgoings.

Centre rules

All shopping centre leases will include (usually at the back of the lease attached to a schedule) the shopping centre rules. You should make sure you read these carefully and ensure they are suitable and appropriate for your business and permitted use.

Summary

In summary, there are a lot of factors to consider when entering into a lease. Whether you negotiate the commercial terms yourself or through your franchisor, remember always to have your lawyer and accountant check the documents that you are being asked to sign before it is too late and you are locked into a long term agreement.