The rent on an empty shop is only the starting point | Source: Pexels

Signing the lease is the first big commitment of opening a shop. The agent quotes a weekly figure, and most people build their business plan around it. Then trading starts: the land tax bill arrives, the building management fee arrives, and at the end of the term the landlord asks for the premises to be stripped back to a bare shell. Every one of those costs was in the lease all along. This article walks through the four most underestimated costs in a commercial lease, and how to negotiate them down before you sign.

Outgoings are how the landlord passes the property's running costs to the tenant: council rates, water, insurance, building management, common area maintenance, and marketing levies in shopping centres. Two leases with the same headline rent, one gross (all-inclusive) and one net (everything on top), can differ in true cost by twenty per cent or more.

If your premises is a retail shop (most shops and restaurants are), the Retail Leases Act 1994 (NSW) gives you several layers of protection: the landlord must provide a disclosure statement at least 7 days before the lease is entered, setting out the expected outgoings; outgoings not listed in the disclosure statement cannot be recovered from the tenant. As for land tax, the lease can require the tenant to contribute, but under s 26 the amount the landlord can recover is capped by statute: it is calculated as if the property were the only land the landlord owned, without special trust or non-concessional company surcharges, so the higher land tax generated by the landlord's wider portfolio cannot be passed on to you.

The pre-signing move: go through the disclosure statement line by line, then ask the landlord for the property's actual outgoings statements for the past two years. Where the estimate and the history don't match, ask why on the spot.

The make good clause sets the condition you must return the premises in when the lease ends. The wording is worth tens of thousands: "restore to the condition at commencement" and "restore to bare shell" are entirely different obligations. The second means the fitout you paid dearly to install must be paid for again, to remove. For restaurants, the exhaust ducting, cool rooms and waterproofing can cost astonishing amounts to strip out.

Three negotiation points. First, prepare a photographed condition report at entry and have both parties sign it; it is the only reliable evidence of what "original condition" was. Second, push the make good obligation toward "condition at commencement, fair wear and tear excepted". Third, consider a fixed make good payment in place of physical works, which makes the cost predictable.

The make good bill arrives the day the keys go back | Source: Pexels

The rent review clause sets how the rent rises each year: a fixed percentage, CPI, or a market review. A fixed 4 to 5 per cent compounds to more than 20 per cent over five years, so cost the whole term, not the first year. For market reviews, read the valuation mechanism and the dispute process. In retail leases, "ratchet" clauses (rent can go up but never down) are prohibited; if you see one, ask for it to be deleted.

The option to renew is the most valuable and most easily lost right in the lease. It must be exercised in writing, within the specified window. The common drafting is no earlier than 6 months and no later than 3 months before the term ends, though leases vary, so check yours. Miss it by a day and the option is gone, however well the business is trading. The day you sign, put the window's opening and closing dates into your calendar with reminders. It is the cheapest way to protect years of trading rights.

Landlords typically ask for one or more of three things: a cash deposit, a bank guarantee, and a personal guarantee from the directors. The first two are capped sums. The third is uncapped risk: if the company cannot pay the rent, the landlord comes to you personally, and your family home is no longer a stranger to this lease. Whether a personal guarantee can be avoided, capped (say, at six months' rent), or replaced by a larger bank guarantee are all negotiable, and we covered this in detail in our earlier article on personal guarantees.

One last reminder: when you sell the business, assigning the lease needs the landlord's consent, and the outgoing tenant's guarantee is not automatically released on assignment. When selling, make sure a release of the original guarantee is written into the assignment documents; otherwise, if the new operator falls behind on rent, the account can still land on you.

Sun Lawyers · Sydney Office

If you are about to sign or renew a commercial lease and want the true cost of the outgoings, make good and guarantee clauses understood before you commit, or you are in a dispute with your landlord, contact Sun Lawyers. We work in both English and Mandarin.

Phone: 02 9267 4988　｜　Email: enquiry@sunlaws.com

Sydney Office: Suite 703 & 704, 265 Castlereagh Street, Sydney NSW 2000

Website: sunlaws.com.au

This article is general legal information only and is not legal advice.
Please contact us for advice specific to your situation.