You have finally found a perfect location for your business, the owners corporation rules are not onerous, you can open 24 hours, run classes from the early hours of the morning until late into the night. The location, look and feel of the premises is just perfect and it fits your meticulous nature, that perfectionist in you which wants everything just right. My tip? Pay attention to the lease. Be alert to the potential legal traps early on and avoid the heartache later.
You cannot predict the future, but we can make your life easier by pointing out six of the most common pitfalls affecting fitness business owners when negotiating leases.
#1 Permitted use
A lease may give you exclusive rights to use, occupy and run your business from a premises but it does not give you a right to do whatever you choose. Every lease will specify what the business owner may use the premises for. Our experience has shown that if you do not pay attention to how the permitted use is expressed, it is highly likely that it will exclude aspects of your business which may be integral to your financial success. It could be that if a permitted use is too prescriptive, it may bar a fitness business from introducing new cutting edge classes.
#2 Know your lease – the devil is in the detail
Read and understand the lease! A lease is never ‘standard’. Often, a lease will require the tenant to undertake certain works. This may include, painting the walls every five years or entering into a service contract with a reputable company for air conditioning maintenance. To comply with these obligations, you must:
- diarise when these obligations are due; and
- ensure that you are in a financial position to undertake these repairs.
If these obligations seem onerous, there is no harm in trying to negotiate these clauses before signing the lease. If you are unable to undertake these repairs, you may be in breach of the lease and the landlord may not hesitate to terminate the lease leaving you with potentially heavy financial loses, a business but no premises.
#3 Rent review – there is room to move
If you entered into a lease with multiple terms, at the commencement of the further term, the rent will be adjusted to reflect the market rental. If you feel that the revised rent provided by the landlord is just that little bit too high, question it. The revised rent must reflect the market! If the landlord cannot provide evidence of the revised rent or the evidence is dubious, you have a right to challenge the rent but remember to look at the timeframes specified in the lease, the timeframes are generally short – the devil is in the detail (see point 2 above)!
Regardless of what a landlord tries to tell you, you are not required to pay the revised rent during the period the revised rent is in dispute. The rule of thumb is that if you dispute a market rent review, the rent payable is the same rent which you paid in the previous year. Once the new rent is payable an adjustment will be made.
When budgeting and planning your business always remember that the rent is misleading. The real cost is rent plus outgoings. This figure will likely be a substantially different figure to the one explicitly noted in the lease. Outgoings are the landlord’s reasonable expenses associated with holding the property in relation to size of the leased area, this could include water and council rates or insurance for instance. These outgoings are liable to change from one year to the next and it is crucial that you know what you are being charged. There are also specific property related expenses which a landlord cannot pass on to the tenant, for instance, land tax, but often you hear stories of landlords attempting to pass these expenses to the unsuspecting tenant. The best protection against being overcharged for these outgoings is to know the lease and ask your solicitor or advisor whether these outgoings are usual for the premises you are proposing to lease.
#5 Know the physical building
Does the structure of the premises, look a little worse for wear, are you are concerned that there may be issues with water leaks, pest infestation or plumbing or electricity issues? You may be keen to sign the lease, but it is in your interests to wait. You must ensure that a condition report is provided prior to entering the lease, many landlords try to wiggle their way out of this requirement.
The condition report should cover the whole premises in sufficient photographic detail. If there are any structural issues or other aspects of the premises which cannot be illustrated by photograph, a detailed written description should be provided.
The importance of the condition report is twofold:
- a thorough condition report will draw your attention to any issues with the premises which are less noticeable to the eye; and
- at the end of the tenancy when the make–good obligations kick in, the condition report helps to clarify the condition of the premises at the commencement date of the lease.
#6 Know when you don’t know
Business and law are two separate skills. We all know that being better at business is the more important skill, so you know what? Pass the leasing off to an expert. A solicitor can ease your mind and let you concentrate on business growth. Our role is to allow you to grow your business.
The best ways to avoid a dispute are:
- always keep open lines of communication with the landlord and agent. Always communicate in a prompt, timely and polite manner; and
- do not be shy, know when you are out of your depth and engage a solicitor or experienced advisor.
Daniel Mainzer is a property lawyer and senior associate at Velocity Legal with a particular interest in retail leasing and how it affects small medium enterprise. He has extensive experience providing businesses with strategic advice and has an extensive understanding of the commercial risks and drivers of small and medium sized businesses.
If you would like a complimentary discussion about any legal issues facing your business or leasing concerns that you may have, please contact Scott McKenzie on 0432 920 510 or Daniel Mainzer on 0459 022 640.
Daniel is passionate about simplifying advanced problems. As a property lawyer, he distills complex issues and crafts solutions which work best for his clients. This has made Daniel a trusted advisor for high net worth individuals, private companies and property developers in the acquisition, disposal and leasing of commercial property. Daniel is also a passionate person outside work – combining community involvement, time with his family, cycling for the Tour de France (one can dream!) and dabbling in obscure documentaries.