Seven things to check before signing a commercial lease in Brisbane

A commercial lease can be one of the biggest financial commitments your business makes.

The rent might look manageable when you first inspect the premises. But rent is only one part of the equation. Outgoings, rent reviews, repairs, make-good obligations, guarantees and restrictions on how you use or transfer the premises can substantially change the real cost — and risk — of the lease.

Once a lease is signed, negotiating those terms becomes significantly harder.

If you're considering leasing an office, warehouse, showroom, medical suite, restaurant or retail premises in Brisbane, here are seven areas worth checking carefully before you commit.

1. The lease term and your options to renew

Start with the basics: how long are you actually committing to the premises?

A lease might provide for an initial three-year term with two further three-year options. That sounds flexible, but the wording surrounding those options matters.

Check:

• the initial lease term;
• how many options are available;
• the length of each option;
• when you must exercise an option;
• whether there are conditions attached to exercising it; and
• whether the landlord can refuse an option because of an existing breach.

Missing an option deadline can have serious consequences. A successful business can suddenly find itself negotiating a completely new lease from a weak bargaining position — or looking for new premises.

The right term depends on the business.

A business investing heavily in fit-out may want longer-term security. A growing business may prefer flexibility if it expects its space requirements to change.

The important point is that the lease term should support your business plan, not work against it.

For leases extending beyond three years, including relevant option periods, registration of the lease should also be considered as part of the legal review.

2. Rent reviews — and what the premises could cost in three or five years

The starting rent is important.

The rent review mechanism can be even more important.

Commercial leases commonly provide for rent to increase through mechanisms such as:

• fixed percentage increases;
• CPI increases;
• market reviews; or
• a combination of different review methods during the lease.

A seemingly small annual increase compounds over time.

For example, a lease with fixed annual increases may result in materially higher occupancy costs by the end of the term than the headline rent you negotiated at the beginning.

Market reviews create different issues. The lease should clearly explain how market rent will be determined, what happens if the parties disagree and whether any restrictions apply to the reviewed rent.

Before signing, model the rent across the entire proposed lease term, including any option periods you realistically expect to exercise.

Don't just ask:

What is the rent today?

Ask:

What could this premises cost my business in three, five or ten years?

3. Outgoings and the real cost of occupying the premises

Rent is rarely the only amount payable.

Depending on the lease, the tenant may also be required to contribute towards expenses associated with operating or maintaining the property.

These are generally referred to as outgoings.

They may include items such as:

• council rates;
• water charges;
• building insurance;
• cleaning and maintenance of common areas;
• security;
• management costs; and
• other property operating expenses.

Queensland's Small Business Commissioner specifically recommends that tenants understand the outgoings payable in addition to rent before entering a commercial lease.

The lease should make it clear which costs are recoverable from you and how your contribution is calculated.

This is particularly important in shopping centres, strata developments and multi-tenanted commercial buildings.

Before committing to the premises, work out your total occupancy cost, not simply the base rent.

A tenancy advertised at $80,000 per year can look very different once outgoings, GST, utilities, insurance obligations and other costs are added.

4. Permitted use, planning approvals and restrictions on your business

A commercial lease normally contains a permitted use clause describing what business can be conducted from the premises.

This clause deserves more attention than it often receives.

If it is too narrow, it can restrict your ability to change or expand the business.

For example, a permitted use of:

Accountancy practice

may be much more restrictive than wording allowing:

Professional services and associated business activities.

You should also make sure your intended use of the property is actually permitted by the relevant planning and regulatory requirements.

The Queensland Small Business Commissioner notes that local planning requirements and permitted uses can affect whether a business can legally operate from particular premises. This can be especially important for businesses such as gyms, hospitality venues, automotive businesses and other uses requiring particular approvals.

Depending on your business, you may also need to consider issues such as:

• signage;
• parking;
• outdoor dining;
• liquor licensing;
• grease traps;
• ventilation;
• accessibility;
• operating hours; and
• building or development approvals.

The fact that a landlord is willing to lease the premises to you does not necessarily mean the premises can lawfully be used for everything you intend to do there.

That needs to be checked separately.

5. Repairs, maintenance, fit-out and make good

Who pays when something breaks?

That question can become surprisingly expensive.

Commercial leases often place significant repair and maintenance obligations on tenants.

Before signing, check responsibility for items such as:

• air-conditioning;
• electrical systems;
• plumbing;
• doors and windows;
• fire equipment;
• lifts;
• plant and equipment;
• structural repairs; and
• damage caused by ordinary wear and tear.

The condition of the premises at the beginning of the lease should also be documented.

A detailed condition report supported by photographs can become important years later when the landlord argues that the tenant must repair or replace something.

Then look carefully at the make-good clause.

Make good governs what you must do when the lease ends.

You may be required to:

• remove your fit-out;
• remove signage;
• repair walls and floors;
• repaint;
• replace damaged items;
• remove cabling;
• reinstate altered areas; or
• return the premises to its original configuration.

The cost can be substantial, particularly where a tenant has installed a major office, medical, hospitality or retail fit-out.

Queensland's Small Business Commissioner specifically recommends determining whether make-good obligations apply and documenting the original condition of the premises.

Negotiate these obligations before spending money on the fit-out.

6. Personal guarantees and security

A company tenant does not always mean your personal assets are completely removed from the risk of the lease.

Landlords commonly request security such as:

• a bank guarantee;
• a cash bond;
• a director's guarantee; or
• personal guarantees from business owners.

A personal guarantee can expose the guarantor personally if the tenant company cannot meet its obligations.

That exposure may extend beyond unpaid rent.

Depending on the wording of the lease and guarantee, the landlord may seek amounts relating to outgoings, damage, make-good obligations, interest, legal costs and other losses.

The Queensland Small Business Commissioner identifies personal guarantees and the potential exposure of guarantors as an important issue tenants should understand before entering a lease.

Before signing, understand:

• what security you are providing;
• how much of your personal exposure is potentially unlimited;
• when the security can be called upon; and
• when the guarantee or security must be released.

A guarantee should never be treated as just another signature page.

7. Your ability to sell, assign, sublease or exit the lease

Businesses change.

You might sell the business, bring in a new investor, restructure the company, move to larger premises or discover that the location simply isn't working.

The lease needs to tell you what happens next.

Check the provisions dealing with:

• assignment of the lease;
• subleasing;
• change of control of the tenant company;
• sale of the business;
• landlord consent;
• landlord's legal costs;
• early termination; and
• continuing liability after an assignment.

Queensland's Property Law Act 2023 contains provisions relevant to processes such as assignments, subleases, changes to permitted use and alterations of leased premises, making these clauses an important part of any current commercial lease review.

You should also understand exactly what constitutes a default under the lease and what rights the landlord has if a default occurs.

Ending a commercial lease early is rarely as simple as returning the keys. A tenant attempting to walk away may remain exposed to significant financial and legal consequences.

Your exit strategy should therefore be considered before you enter the lease, not when you are trying to leave it.

Is it a retail shop lease?

There is another important question for Queensland businesses:

Does the Retail Shop Leases Act 1994 apply to your lease?

The Act applies to many premises in retail shopping centres and premises used wholly or predominantly for prescribed retail businesses, subject to exclusions.

If the Act applies, additional rights, obligations and disclosure requirements may apply.

For example, a landlord generally must provide a prospective retail tenant with a prescribed disclosure statement at least seven days before the tenant enters into the lease.

There can also be requirements relating to legal and financial advice reports for certain prospective retail tenants.

Importantly, don't assume that nothing is binding simply because the formal lease hasn't been signed. In certain retail leasing circumstances, taking possession or paying rent can result in a retail shop lease being treated as having been entered into.

That is one reason legal advice should be obtained before taking possession, paying rent or signing lease documents.

A lease review is about more than finding bad clauses

A commercial lease review should not simply produce a list of legal terminology.

The more useful questions are commercial:

• What will this tenancy actually cost?
• What risks are being transferred to you?
• Can your business operate the way you expect?
• What happens if the business grows?
• What happens if you sell?
• What happens if something goes wrong?
• And what will it cost to leave?

A well-negotiated lease gives both parties clarity from the beginning.

A poorly understood lease can create problems years after the excitement of securing new premises has disappeared.

Before you sign, know what you're committing to

Commercial leases can run for years and involve hundreds of thousands — sometimes millions — of dollars in rent and associated obligations.

Getting the terms right at the beginning is considerably easier than trying to resolve a leasing dispute later.

Trilogy Law Group advises Brisbane businesses, landlords and tenants on commercial and retail leasing, including lease reviews, negotiations, renewals, assignments and leasing disputes.

If you have received a proposed lease or heads of agreement, speak with our team before committing to the premises.

Experience. Solutions. Outcomes.

This article contains general information only and does not constitute legal advice. Leasing arrangements vary considerably and advice should be obtained regarding your particular circumstances.