Part 1 of 2-part series on leasing for small business premises
Leasing: Success, Security and Saleability for your Small Business
One of the most important determinants of the success of a small business is location and costs. These come together when leasing premises for your business. If you do not own your premises, the success, security and saleability of your business depends on the terms of your lease.
What is it All Going to Cost?
The success of your business will depend to a large extent on your ability to limit your costs.
Rent is likely to be one of your largest fixed costs, so it is important you understand how much it is and by how much it can change during the lease.
Typically, the starting rent will be a fixed annual amount, which gives you some certainty; but you need to budget for any possible increase during the term of the lease. Rent is often increased each year by either a fixed percentage or any increase in inflation or CPI.
Leases also often provide for a market review of the rent, often every 3 or 5 years or on the exercise of an option to extend the lease. A market review usually involves the Landlord and Tenant attempting to reach agreement on the new rent; and appointing a valuer to determine the rent if agreement cannot be reached.
But rent is not the only cost to look out for in your lease, you may also need to budget for:
- Outgoings being rates, land tax, water rates, and water usage, garbage, etc,
- Insurance (public liability, plate glass),
- Repairs and maintenance;
- Contributions to the running costs of a building or centre with multiple tenants and shared common areas;
- Legal costs (Lease registration, amendment);
- Refitting costs; and
- Making good at the end of the lease.
So What am I Actually Leasing?
The security of your business depends on having certainty around what you can use, what you can use it for and how long you can use it.
The lease should describe all the property being leased including any shared areas e.g. carpark, toilets, foyer and lifts, and any additional items such as furniture, plant or equipment. It is important that if you or your customers need to cross land you are not leasing to get access to your premises, that your lease contains the legal right for that access.
Your lease should set out what you can use the premises for. This will generally be done by listing the type of activities you can undertake or the type of business you can run from the premises. A broad usage clause is advisable in case your business expands into other activities. You should also confirm with council that your proposed use is lawful under the town planning scheme and that you have any approvals you need before locking yourself into the lease.
How long you can use the premises for (the term of the lease) should be set out, with a clear start date and end date, along with the terms of any option periods. We recommend ultimate flexibility by having a series of options so that you have the certainty of a long term lease if you need it, but are not locked into a long term lease if your business needs change.
Look out for Part 2 of our series in leasing for small business which continues to look at Leasing: success, security and saleability for your business