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With the excitement of starting a new business or having your existing business move premises, there is often a rush to sign a commercial lease without proper consideration of its terms. A commercial lease is generally one of the biggest financial commitments of a business owner. Accordingly, it is critical that you understand its terms and conduct your due diligence prior to signing it.

Some important considerations are as follows:

1. Does the Retail and Commercial Leases Act 1995 (SA) (Act) apply to the lease, and if so, has the Act been complied with?

Subject to a few exceptions, the Act applies to any lease entered into whereby a business is carrying out any of the following at the premises subject to the lease:

  • providing a service to the public;
  • selling goods to the public; or
  • inviting the public to the premises to negotiate a service.

The exceptions in which the Act does not apply includes commercial leases where:

  • the lease term is for less than one month;
  • the annual rental is in excess of $400,000;
  • the lessor is a company which the lessee has a controlling interest in; or
  • the lessor and lessee are both companies with the same person/s having a controlling interest in both companies.

If the Act does apply to your lease, it is important to note the obligations which the lessor has to you as a lessee and the protections in which it provides you. You must also ensure that the obligations are carried out by the lessor and that the protections are implemented in your lease terms. In particular, you will need to ensure the following before you sign the lease:

  • that you have been provided with a Disclosure Statement and a copy of the proposed Lease (including an itemised list of estimated outgoings and how outgoings will be proportioned between tenants (if applicable)).
  • that you have been a offered a minimum of a five-year lease term and if it is not five years, you can either exercise your right under the Act and have the lessor amend the lease to be for a minimum of five years or if you are ok with the lease being under five years, you will need to complete an certified exclusionary clause in the lease to waive your right to a minimum five year term.
  • that you will not be required to pay any land tax owed by the lessor.
  •  that if the lease requires you to pay a security bond, that the security bond does not exceed the amount equivalent to four weeks rent.
  • that you are not required to pay more than half the costs of the preparation of the lease.
  • that the lease sets out only one method of reviewing your rent.

If the Act does not apply to you, it is still recommended that you negotiate the lease on similar terms as if it did apply.

2. Does the lease require you to sign a Directors Guarantee or Personal Guarantee?

If you sign a Director’s Guarantee or Personal Guarantee, you will be personally liable to carry out the obligations under the lease in the event the lessee (your business) cannot. For example, if your business is not doing well and cannot meet the lease payments, then the lessor can seek payment from you personally. In the event neither the lessee or you can make the lease payments, then there is a risk that lessor may sue you and the business for any monies owed under the lease terms (which can be significant). Accordingly, your personal assets such as your home are exposed and, if payment cannot be achieved, you could potentially lose those assets.

If the lessor wants you to sign a Director’s Guarantee or Personal Guarantee, we strongly recommend that you first seek legal advice.

3. Is there provision in the lease for it to be registered on the Certificate of Title?

It is favorable to you to have the lease registered on the Certificate of Title of the real property in which the premises you are leasing is on, as it will secure your tenancy for the time reflected in the lease.

If the lease is not registered on the Certificate of Title and the lessor sells the property during the term of the lease, the new owner may not be bound to continue the lease. This could cause significant loss to you, in particular if you rely on location for business or if you outlaid a high dollar amount for a fit out and result in your having to go to Court to recover those losses from the old owner (lessor under your lease).

4. Are you allowed to operate your business from the premises?

It is important to know whether the business which you propose to operate from the premises is allowed by your local Council. If you are not sure, you should find out from your Council and, if necessary, negotiate a special condition in the lease that it is subject to you obtaining all relevant consents / approvals from the Council.

These are just a few matters that require consideration before signing the lease but there are many more! If you are entering a commercial lease, please contact us at Clarke Hemmerling Lawyers on 8333 2130 before signing. We can advise you of your risks and help negotiate any terms for you.

This blog was written by Michelle Moore, Associate at Clarke Hemmerling Lawyers

This blog post does not constitute legal advice and should not be relied upon as such. It is a general commentary on matters that may be of interest to you.  Formal legal or other professional advice should be sought before acting or relying on any matter arising from this communication.