Understanding The Lease Agreement

In my experience one of the biggest obstacles when selling/purchasing a small business is the Lease Agreement! When venturing into the world of business you seem to be so caught up in your own plans and anxiety that you have little or no time to think long term effects of anything else. One of the most important ingredients to a successful business is your space i.e. location, size and lay out. When you finally find the place that “feels right” you are so relieved that you practical somersault over to sign the lease agreement  so that you can start painting! Not until the euphoria has worn off do you realize “the guy next door is paying half the amount you are” or “you got the price you wanted but the Landlord blocks your sale”. All the anguish, loss of profit and money spent on legal teams can almost always be avoided at the very beginning by clearly reading your Lease Agreement and knowing your rights to make amendments. In Victoria entering into a commercial Lease Agreement provides responsibilities for both Tenants and Landlord under the Retail Leases Act 2003 (“Act”)- your rights are public information yet so many of you have no idea what they actually are.Here are the 5 most common rights your Landlord hopes you don’t know…

You Can Cover Yourself

Many Landlords have an unrealistic view of how their property should be returned once you leave the premises. By spending some time in the beginning you can save yourself lots of money down the track. Before you move into the premises, you should obtain a detailed inspection report (including dated photos). Landlords have been known to try and blame faults on the tenant to stick them for the cost and all too often I get cases where its word against word which can be extremely difficult to navigate around and will end in money lost for both parties. Under the Act a Tenant must return a property in a reasonably clean state with no intentional damage. The Act takes into account wear and tear, any depreciation, and the general standard of the property before you moved in. Some Landlords have a very short memory of what the property was like when the tenant moved in “The carpet was old but I swear that big stain was not there and that’s the reason I need to lay new carpet”. In a case like this the revised condition report can squash this issue in a matter of seconds- “refer to photo dated 3 days prior to the lease agreement  sign and not stain on carpet”.

It happens to all of us- we want to buy for a steal but sell for a diamond! Landlords are no different- commonly the landlord has a mortgage on the property and depending on how much the repayment is- usually effects the price of rent. Here is where you need to tame your excitement and try and be realistic about how much you’ll be making and when you would like to sell. It is always better to work on a worst case scenario i.e “I know I’ll be making $10,000 so $2,000 rent is fine- but if I make $3,500”? There is nothing more damaging then high rent- it drastically lowers the sale price of your business and leaves you with hardly any, money in your pocket. Ideally you want the right space for minimal rent and long term lease agreement- if you find the business is not for you this combination will make your business easier to sell! This doesn’t mean when surfing the net that you should avoid looking at spaces that ask for rent out of your budget- so many people seem to forget rent is not a fixed price- especially in this economy. Do your homework- find out what people in the street are paying and the leasing demand in the area and then present your figure to the landlord and negotiate from there. If business brokers are helping you buy the business ask the business brokers for help. Many business brokers should know the local rent as they have sold many business in the area. Business brokers can help.

Many Landlords get into Retail Leases with out learning the rules of the game. Imagine trying to play football without knowledge of the rules. You would not know what a rule infraction would be and it would be impossible to win. Translated into Retail Leases for Tenants, it’s no secret: knowledge is power. Knowledge of the Act and Regulations can make the difference between a profitable venture and a loss. Familiarise yourself with the Act and you will know that the Victorian Civil and Administrative Tribunal; VCAT which deals with Tanant and Landlord disputes is pro-Tenant So often I see disputes that result in Landlord reluctant to repair or put up money- yet the Act demands it. Landlords don’t want you to know that they have legal obligations to undertake urgent repairs or to rental reviews and can be quite rude. Hold your ground and don’t let them intimidate you -Don’t hate the Tenant, hate the game. Again business brokers will be able to assist you.

Employing Legal Maneuvering

By employing legal maneuvering and making part payments you can avoid eviction. Landlords always enforce the terms of rent payment based on the Lease and can charge you for late payments and fees. However, what Landlords don’t want you to know is that if not enforced, the Landlord runs the risk of creating a dangerous precedent that may cost the landlord dearly, and save you money. If business is slow and for some reason a Tenant fails to pay rent for two weeks, then legal notices and actions must be initiated as soon as the law allows. Make a part payment to your Landlord and if he accepts this then you may have bought yourself some more time. The Courts and VCAT interpret receiving partial payments from Tenants as an acceptance of terms by the Landlord. Any eviction process is terminated for that rental period while Landlord’s costs increase. Landlords will cash your rent cheque a flash, but will take 24 hours to release a Tenant’s security deposit.

Trading through a Company may protect you personally if the Company signs the Lease. If you are a sole trader, then the Lease would be in your sole name, If you are in a partnership then the Lease would be in the name of the partners. By having a Company as the Tenant of the Lease, you may be able to limit your personal liability, unless you sign a personal guarantee. It is easier to wind down a Company then to become personally responsible. Business brokers are a good source to deal with when business brokers help facilitate the sale of the business. Business brokers have the knowledge and a good business broker should offer his help with what is available to you. Ask your business brokers for help and good business brokers will guide you through the process.