What’s in a term? Points to consider when negotiating your lease
Assisted By Holly Pitt
An important concept to consider when negotiating a lease is the length of your term as ramifications can arise in regards to the term of lease - including how the term can affect the value of your business, particularly when goodwill is driven by location.
Sometimes, depending on who the landlord is, it may be difficult to get the term length that you desire. Some landlords may have a maximum term while other landlords have a policy of not agreeing to options to renew. You should consider the impact of this on the viability of your business.
It is also important to consider the commencement date of your lease. For instance, if the commencement date coincides with a slowdown in the business cycle, you may struggle to establish your business. You should also take into account other factors which may affect commencement: whether or not you have received all relevant approvals, if the fitout has been fully completed and when trading can commence. You may wish to delay commencement until these issues have been finalised.
In a new development, you should also look at the timing of completion of premises for other businesses trading near yours. There is potential for disaster if you open a business and there isn’t enough daily foot traffic to sustain it.
With regards to options to renew, look at how long the term/terms should be, how rent will be determined on exercise of option and the dates of exercise of option. Make sure you diarise those dates and stay on top of when your option period/periods begin and end.
If you’re negotiating a retail lease, the Retail Leases Act addresses issues such as market reviews (and impacts on exercise of option) and where there are no options to renew. This is a good reference point for where to look next in negotiations. The Act also specifies a minimum term (five years). If you want less than the minimum term, there is a process which needs to be followed.
If you are a franchisee entering into a lease directly, you need to make sure that your lease terms align with the terms of your franchise agreement.
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