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How does commercial lease pricing work?
Updated: 26 September 2022
No matter what type of business you want the property for, signing a commercial lease is an important step for any startup. While it is exciting it can also be daunting, especially if you have never done it before. There is a lot to consider with how commercial lease pricing works.
Costs of entering into a commercial lease
While the obvious costs are the rent and outgoings, there may be others such as:
- Stamp Duty
- Lease registration
- Legal costs for the preparation of the lease
- Legal costs if you default on the lease.
There could be other costs so make sure you understand them all.
Who pays these costs will depend on the negotiation process and the type of commercial lease you sign.
It is vital to get good legal advice from the beginning so you know there are no hidden costs and to protect your rights. Once you enter into a lease it can be too late. You can only have the terms and conditions of a commercial lease changed with the written permission of both parties. So it is vital to understand your obligations under the lease before signing it. Where you need to clarify some points, get expert legal advice.
Who pays the legal costs?
When negotiating a commercial lease, there are a few clauses you want to look out for, the legal costs clause is one.
So who pays legal costs?
In a nutshell, usually both parties pay their own legal costs. But sometimes landlords (aka lessors) will try to get you to pay their legal costs.
And, if you come across a clause that says you have to pay the other side’s legal costs, you can challenge it and ask the landlord to pay their own costs.
Before the lease – Heads of Agreement or Disclosure Statement
Beware. The cost clause may appear not just in the lease but also in the first document you receive outlining the key lease terms the lessee asks you to sign. This could be a Heads of Agreement or a Disclosure Statement (if you're entering a retail lease). Signing a Heads of Agreement means you intend to continue negotiations usually with the involvement of your solicitor and accountant.
So does it matter if you sign a Heads of Agreement or Disclosure Statement before you see solicitor?
Yes and here is why.
The Heads of Agreement and Disclosure Statement set the tone for what to expect in the lease and may also be legally binding. If they are not legally binding, you will see a statement that says, “these terms are not intended to be binding unless both parties enter a lease”.
So this answers a popular question that clients have—when should I see a lawyer about a commercial lease?
The answer: when you first get the Heads of Agreement or Disclosure Statement.
Even if there is a statement in a Heads of Agreement or Disclosure Statement that says the document will not be binding until a lease is entered, beware of the negotiation trap.
The negotiation trap is when the landlord reminds you that you already agreed to certain terms upfront in the Heads of Agreement or the Disclosure Statement and it is too late to re-negotiate.
The moral of the story here is to get advice early, before you sign off on initial key terms whether in a Heads of Agreement or Disclosure Statement.
The legal costs clause
Here is an example of what a legal costs clause may look like in a lease (where the landlord asks you to pay their costs):
The lessee will pay the lessors lease preparation expenses including but not limited to costs on negotiation or amendments and the lessors reasonable legal and other costs, charges and expenses of and incidental to the completion and registration of the lease and any surrender or termination and the lessors reasonable legal costs and expenses in and about attending any mortgagee's consent and the production of title.
Now that is one long clause!
I gave you this example because it is one of the worst clauses for legal costs and is difficult to understand.
By the way, this clause was tucked away under "general", so easy to miss.
The tenant usually pays the lease registration cost. It is paid to the land registry and usually costs around $140.
Now, the other costs in the clause above are usually paid for by the landlord.
That is, the landlord pays their own legal costs and you, as the tenant, pay your own legal costs.
Tips for negotiating a commercial lease
The negotiation process of a commercial lease is important. It sets the terms and conditions you are liable for under the lease. Here are some things to consider:
- Annual rent. Rent is usually calculated by the per square metre of space. So calculate the yearly cost by multiplying the cost being quoted per square metre by the property’s actual square metres.
- Length of the lease. You may want a long lease to give you the stability to build your business. You also need to consider that if your business grows faster than you expect you can outgrow the space.
- Bank guarantee and security deposit. Most landlords require a bank guarantee or security deposit when entering into a commercial lease. Make sure you factor this cost into your budget.
- Check subletting and lease assignment. It is important to understand whether you can sublet part of the premises or assign the lease to another party. This particularly important if the business structure changes.
- Check the rent reviews. Few landlords want fixed rent for their premises over the long term so there will be periodic rent reviews. Check the lease to make sure you know when these are applicable.
While you may see legal costs under a clause labelled legal costs you may also find this clause tucked away under a heading labelled general or miscellaneous.
Make sure you negotiate the terms of a commercial lease. You have nothing to lose and you can stash the cash you save on legal costs for other setup costs.
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I wish you every success in your ventures. I am always available if you need advice