When it comes to retail and commercial leases, there can be a number of hidden costs that most prospective tenants simply fail to consider. Nonetheless, given that budgeting is often a make or break issue, it’s important that tenants take the time to familiarise themselves with the costs associated with their lease in order to accurately balance their books.
Lease Preparation, Negotiation and Execution Fees
Tenants who intend to become party to either a retail or commercial lease will need to seek their own, independent legal advice in relation to their lease agreement.
For those who plan to enter into a commercial lease agreement, it is sometimes the case that tenants are asked to cover the landlord’s legal costs, however this is a matter for negotiation between the parties.
This means that commercial tenants who agree to pay the landlord’s costs are responsible for paying for lease preparation, negotiation, and execution fees, in addition to their own advice. This can be quite costly, but as we outline in this article, might be something that you can negotiate with your landlord on (hyperlink).
Those looking to enter into a retail lease agreement are in a better position, as the retail lease legislation in most states guards against landlords passing legal costs on to tenants. However, watch out for South Australia where the tenant is responsible for half of the landlord’s lease preparation expenses.
Rent Up Front
Your landlord will generally also require you to pay a certain amount of rent up front, and in advance. It is standard practice for tenants to pay at least one months’ rent in advance, but this period may be shorter or longer, depending on the commercial terms agreed between the parties.
For certain kinds of businesses and sites, tenants will be required to outlay a sizeable sum of money in order fit-out the premises. For example, if a tenant is planning to lease premises, intending to use it as a restaurant, but the premises contain no kitchen, the tenant may be responsible for the costs of installing a kitchen and related restaurant fitout such as a bar etc. The tenant may also be responsible for stripping back the premises/removing the fit-out upon vacating the property. For more information on fit-out costs, see this article (hyperlink).
Your landlord will usually also require you to pay a bond/security deposit. This is to provide security against loss should you default on rental payments or damage the premises and fail to repair them prior to vacating.
Security deposits/bonds usually amount to the equivalent of 3 to 4 months’ rent, although the amount can be less or more, depending on the terms of the lease.
The security deposit/bond is recoverable at the end of the tenancy, unless the tenant has failed to pay rent or has defaulted on end of lease/make good obligations in some manner. The lease will dictate how and when the security deposit (or bank guarantee in lieu of a security deposit) is to be returned.
While retail lease legislation generally forbids landlords from passing on the costs of preparing the lease to tenants, landlords can pass on other costs associated with preparing the premises for the tenant, including survey fees. Survey fees are the costs associated with having the premises surveyed, independently by a professional third party, to determine its exact area and dimensions. This is often done to avoid disputes arising over what area may exclusively be used by the tenant under the lease.
Design Review Fees
Similarly, if the premises need to be reviewed for a new design prior to the commencement of a retail tenancy, the landlord may be able to pass these costs on to the tenant.
There are a number of hidden costs associated with retail and commercial leases. Prospective tenants should keep bear the following in mind prior to entering into a lease agreement:
- Legal costs (tenant and landlord);
- Rent up front/in advance;
- Costs associated with fit-out;
- Any bond/security deposit payable and its amount;
- Survey fees; and
- Design Review fees.