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What are some traps in leasing including hidden costs?

Lindsay McGregor, Avant Law - Partner, Head of Property

Leasing is a big investment. You generally take a lease of commercial property (office or retail) for 5 or 10 years at a time with options to renew often included. Entering into a long-term contract such as a lease does come with some risk and these risks need to be ironed out in the beginning.

The following information will help you understand the process involved in leasing. It explains some common traps to look out for, including ‘hidden’ costs at the beginning of a lease and those that can come back to bite at the end.

Who is who?  

The owner of the building or shop is known as the landlord or lessor.  

The doctor or company actually taking the lease is called the tenant or lessee.  

The actual space being let is known as the premises.  

In a subleasing arrangement, the tenant becomes the sub-lessor and the further tenant the sub-lessee.

Location, location, location!

The first stage in a lease transaction is locating desirable premises.  When looking for premises, thought must be given to zoning to ensure you are able to carry out the intended use.  If the zoning is not correct, considerable expense may be on the horizon.

Preliminary works

Consider carefully whether the premises needs upfront works. While a landlord may grant an incentive, carrying out works can be expensive. Do you need to lodge a development application (a DA) to carry out the works? Who is going to carry out the works? Does the landlord need to carry out preliminary works to the base building?  

All these considerations must be thought through, and you may need an architect or town planner to help with this process. Your builder should be introduced to the site as early as possible, and they must be across all the details of the landlord’s works (if any).

Examples of things that can go wrong include a situation where the landlord’s base building air conditioning did not integrate with an internal system purchased by the tenant. Significant expense could be incurred replacing its equipment with a system that was capable of integration.

Like any land transaction, it is also important to consider external factors such as heritage, contamination or asbestos removal – any of which can add considerably to the costs.

If the landlord is granting a fit out contribution or other incentive, make sure to discuss this with an accountant to ensure it doesn’t risk any untoward tax treatment and to ensure depreciation is fully taken advantage of. Be careful with any repayment obligation around the contribution or incentive.

Negotiating the lease

Consider ongoing costs during the life of the lease. Inparticular, consider all costs that can be passed on and whether any additional costs can be introduced.    

Issues to pay particular regard to include:

  • the definition of “outgoings”;
  • the costs the landlord can pass on such as design review fees, consent fees or legal costs for any consent required to sublease or assign your lease; and
  • any new costs that may be incurred in the future, such as additional costs associated with achieving a higher environmental rating than existed at the commencement date.

During the lease

Watch out for incidental charges that can add up. For example, if you are late in paying the rent, is interest payable on those amounts? If there is a breach of the lease, what will your costs be if the landlord takes steps to enforce the lease.

In our factsheet “Does the Retail Leasing legislation apply to my lease and how does it protect me?” we considered key money. If you believe your landlord has asked for the payment of key money, please get in touch with us. In that factsheet we also considered outgoings in more detail.

Consider your maintenance obligations. How often are you going to need to update and refresh the premises? Are works required during the life of your lease? Make sure any capital or structural maintenance costs rest with the landlord as well. This also extends to sinking funds. If the landlord is required to contribute to a sinking fund to fund maintenance to the structure of the building, should the tenant pay for this?

Does your lease contain demolition, relocation or resumption clauses? If so, these could all have considerable costs and while you may be protected to some degree by relevant legislation, there are always additional unforeseen costs incurred when you need to move from one premises to another.

At the end of the lease

At the end of the lease you will likely be required to carry out a ‘make good’. This refers to the work required at the end of the lease to put the premises back into the condition the landlord requires. This may be ‘base building’ where the premises are stripped back, and the services taken back to a central point. Or it may be back to the condition the premises were in at the commencement date. The work required will depend what was agreed when you entered into the lease.  

‘Make good’ work could become expensive and it is vital you know exactly what is required prior to signing the lease. If the premises are to be returned to the condition as at the commencement date, there should be an allowance for fair wear and tear.  

We recommend you take photographs or obtain a detailed condition report when the premises are first made available. Again, this may incur a cost.

We can help you

If you have any questions, or would like more information about how we can assist you or your practice, please call 1800 867 113, or to organise a confidential discussion at a time that suits you, please click here 

About the author

Lindsay McGregor

Lindsay McGregor is a lawyer and the Head of Property in our Avant Law team. He has been working in property related matters for over 20 years. He was previously a partner at a highly regarded national firm and has considerable experience in property transactions across Australia. He has previously acted for some of the country’s biggest property investors and developers and can use this experience to your advantage.

Disclaimers

The information in this article does not constitute legal advice or other professional advice and should not be relied upon as such. It is intended only to provide a summary and general overview on matters of interest and it is not intended to be comprehensive. You should seek legal or other professional advice before acting or relying on any of this content. The information in this article is current to 15 July 2022.  Legal services are provided by Avant Law.  Liability limited by a scheme approved under Professional Standards Legislation. Legal practitioners employed by Avant Law Pty Limited are members of the scheme. © Avant Mutual Group Limited 2024

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