Locked in a Commercial Lease.
Advice from the desk of Simon Terry
I have been helping clients recently with commercial leases they can’t afford, in premises they don’t need, for leases we didn’t discuss, locked in place by personal guarantees.
So I have put together 10 tips of dos and don’ts:
1. Personal guarantees – don’t do it. Accountants create business structures to minimise personal risk so don’t undo our hard work.
2. How well does your proposed commercial lease align with your business plan? If you don’t have a business plan, why are you committing to a lease? If you don’t have a business plan, you need one.
If you have a short attention span, stop here. Read points 1 and 2 again.
- Does your business need a physical location? Low cost, mobile and flexible may be a viable strategy.
- A short lease with multiple options to extend is more flexible than a long lease.
- If you don’t like the landlord, go look somewhere else as they won’t get more likeable over time. If you like the landlord, treat them well. This should be a partnership not a battle.
- Outgoings and utility costs can be substantial – factor them into your cost estimates.
- Rent increases – if your revenue will not increase by the higher of CPI or a 4% annual increase then nor should your rent payments.
- Rent decreases – in many leases this is not possible. If CPI or market valuations go down then so should your rent payments.
- If you are given a discount on rent, make sure rent increases are on the discounted rent and not the face rent.
- Review and negotiate the make good provisions when moving out. The draft lease may require you to replace all carpets, blinds and paint the whole premises.
Permanent fixtures such as carpets and interior office walls have slow depreciation rates – ask the landlord to do the work as an incentive to get you in.
- Desks, chairs and office equipment may qualify for immediate write off.
- Sublet and assignment should be allowable.
- Read the lease before signing it. If the lease has been drafted by the landlord’s lawyer then it will be in the landlord’s favour. Talk with your accountant and a property lawyer.
Avoiding issues up front is more effective than negotiating your way out of trouble.