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

For most people, the first step in establishing a business premises is to enter into a lease and rent one. As a business evolves, tenants often become landlords and purchase their own premises. Even if that is your end goal, it is important that you take the time to understand your rights and obligations before entering into a lease.

Here are some of the key things to consider from the outset.

Heads of agreement or lease proposal

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

Outgoings and additional costs

Get an estimate of what costs you will need to pay in addition to your rent. Most leases require the tenant to make a contribution to outgoings, which can include things like council rates, water rates, insurance costs, and strata levies. Some leases require the tenant to pay a percentage share of outgoings, while others require the tenant to pay 100% or nothing at all. It is important to understand the full cost of occupying the premises, not just the rent.

Maintenance, service, and repair obligations

Understanding who is responsible for maintenance, service, and repair is essential. As a general rule, a tenant is ordinarily responsible for general maintenance, upkeep, and fixing any damage they cause, while a landlord is responsible for repairs or replacement of a capital nature.

For example, a tenant may be required to service an air conditioning system at their own cost on a regular basis, but if a full replacement or significant repair is needed, that will typically be the landlord’s responsibility. Each lease is different, so you need to check.

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

Upfront costs: rent in advance, bonds, and bank guarantees

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 that 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 getting started early to avoid delays.

Insurance requirements

You will be required to provide evidence of insurance for public liability and any other insurance 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 compliant policy fairly quickly, but again, it is worth starting this conversation early.

Makegood obligations

What state do you need to leave the premises in at the end of the lease? This is something tenants often overlook, particularly when they are focused on getting into the premises and starting to trade.

It is common for a lease to require a tenant to remove their fitout at the end of the term. This can include partitions, joinery, cabinetry, and other installations, along with repairing any damage caused during removal. There may also be a redecoration clause requiring painting or the restoration of surfaces like floors and walls. In some cases, a “bare shell” requirement applies, which means the tenant must strip the premises back to a blank canvas, ready for the next occupant to fitout.

Makegood and redecoration obligations can be expensive, and you should budget for them from the beginning.

Other considerations

The items listed above are not exhaustive. There are other important factors to consider, such as the amount of rent, how often it is paid, when it increases and by how much, the length of the lease term, and whether you have the option to extend it.

Need help navigating a commercial lease?

We work with tenants and landlords every day to help them understand and manage the landlord-tenant relationship. If you are thinking about leasing a business premises, or you need advice on an existing lease, our property lawyers can help guide you through the process. Contact our experienced team to discuss your situation.