Signing a new lease for your business in SA? Before you sign, discover the 12 SME lease traps that could cost you big!
1. Failing To Ensure The Party Leasing The Premises Is Entitled To Do So
When entering into a lease, you should be provided with details of the landlord such as the full name, ACN (if a company) and address. It’s important to ensure the landlord description matches the details on the Certificate of Title for the relevant premises. If not, the landlord may not have the right to enter into the lease or to provide you with any interests in the leased premises.
2. Failing To Consider In What Capacity You Should Enter The Lease
Entering into a lease in an individual capacity (as opposed to a company) may expose you to unnecessary risk. Doing so means you’ll have unlimited liability in respect of any claims in connection with the premises and/ or breach of the lease and a court may require your personal assets to be used to satisfy any such claims. If you don’t already have an incorporated company, you may want to consider setting up a company for this specific purpose.
3. Failing To Ensure The Lease Covers The Premises You Actually Agreed Upon
When entering into a lease, you need to ensure you have all required details such as the street address and Certificate of Title reference. These will allow you to check the lease does in fact cover the premises you agreed upon and that the premises, or part thereof, is not already leased to someone else.
If you’re leasing a portion of the land, you should’ve been provided with a plan of the leased premises. You should carefully review this plan to ensure it’s consistent with the area you agreed to lease. There may also be additional costs associated with leasing a portion of the land, particularly if you intend on registering the lease.
4. Not Entering Into A Lease Term Aligned With What You Actually Agreed Upon
When entering into a lease, you should ensure the term of the lease reflects the duration (i.e. number of years) and commencement date agreed. You should also consider if the term is appropriate for the business you intend to conduct from the premises. This will help reduce your risk of being locked into a lease for a certain premises for too long or not having the certainty of premises for your business for a sufficient duration.
The lease may also include rights to renew the term of the lease. Again, you should consider the duration and number of renewals and how these best suit your business. You should also make sure you are aware of the notice provisions relating to renewals to ensure you know when and how to exercise your right of renewal and any conditions that must be complied with prior to renewal.
5. Not Entering Into A Lease With Rent And Rent Review Periods Aligned To What You Actually Agreed Upon
When entering into a lease, you should ensure both the rent and rent review provisions are consistent with the terms agreed between the parties and with industry norms, (e.g. CPI increases). You may also want to check whether there’s a rent free period or other incentive in place.
6. Not Being Able To Use The Premises For Their Intended Purpose
To avoid a breach of lease, you should ensure the permitted use contained in the lease is consistent with the agreement between the parties. It’s also important to ensure your business activities do not go beyond the permitted use otherwise you may be in breach of the lease. If applicable, you’ll need to obtain all licences and approvals required at the premises to carry on the business, e.g. liquor and gaming, council and/ or development approval etc.
7. Not Understanding Your Obligations Regarding ‘Outgoings’
When entering into a lease, you should be aware of your liability for outgoings, such as airconditioning, lift maintenance, management fees etc., and assess whether this liability is reasonable. If the Retail & Commercial Leases Act applies, the landlord is required to provide you with a Disclosure Statement including an estimate of outgoings payable in the first year of the lease.
8. Not Ensuring Repair, Maintenance and ‘Make Good’ Obligations Are Clear
When entering into a lease, it’s important to be aware of the obligations required of you, including the tenant’s repair and maintenance obligations applicable throughout the term of the lease and at expiration or earlier termination of the lease. A failure to attend to repair or maintenance works may result in a breach of the lease and result in the tenant being liable for potentially substantial costs. It’s equally important that the lease clearly outlines what repair and maintenance obligations the landlord is responsible for. Just because the lease notes that the tenant is not responsible for particular types of repairs or maintenance works doesn’t mean the landlord is responsible for these works.
9. Not Ensuring Indemnities and Releases Are Reasonable
When entering into a lease, it’s important to be aware of indemnities and releases the landlord requires, including any requirement for the tenant to indemnify the landlord for any loss or damage suffered on the premises and to release the landlord from any actions or claims in respect of the use of the premises. It’s important to pay careful attention to these clauses to ensure they are not unduly onerous on the tenant and that your insurance policy covers these indemnities. It may also be appropriate for the landlord to provide indemnities to the tenant in particular circumstances.
10. Not Ensuring Security Provisions Are Reasonable
When entering into a lease, it’s important to be aware of the risks associated with security provisions. If you elect to enter into a lease in the name of a company, the landlord may seek personal guarantees from the directors of the tenant company. This may expose the directors in their individual capacity to unnecessary risk. You should carefully consider any personal guarantee provided under the lease.
Alternatively, if you enter into the lease in your personal capacity, the landlord may seek a bank guarantee as security under the lease. You should also carefully consider the terms of the bank guarantee to ensure they are reasonable (i.e. the amount, expiry date and in what circumstances it can be called upon by the landlord).
11. Not Ensuring Default Provisions Are Reasonable
When entering into a lease, it’s important to identify and assess what actions may constitute a default of the lease and your rights and the consequences in the event of any default or any purported termination of the lease. The lease often provides a strict procedure that must be followed prior to termination, including the timeframes to rectify or remedy any alleged default. This procedure should also be assessed to ensure it is reasonable and practical.
12. Not Ensuring ‘Special Conditions’ Are Reasonable and Correctly Documented
When entering into a lease, it’s important to ensure the special conditions are reasonable and consistent with the agreement between the parties. To the extent of any inconsistency between the Special Conditions and the other terms of the lease, the Special Conditions will prevail.
The information contained on this site is a guide and is provided for general purposes only. It should not be relied upon as a substitute to specific legal advice in respect of your lease and we recommend consulting with a legal provider if you require further assistance.
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