As a franchisee you may well need to rent premises for your business and that means signing a lease. Check out our tips for what you need to know before you sign.
A lease is a legally binding agreement to pay specific fees for a set term, and just like franchise agreements are governed by the Franchising Code of Conduct, leases have their own guidelines.
In Queensland for instance, businesses that are retail in nature and/or situated in a retail shopping centre are subject to the Retail Shop Leases Act 1994. There is similar legislation in other states and territories. This article will focus on the Queensland legislation.
Before you sign your lease there are some important considerations:
1. Offer to lease
The time to negotiate the key terms of the lease such as rent, reviews and costs will be in the offer or agreement to lease (OTL). This is often an agreement prepared by the landlord’s agent and sets out the key terms of the Lease. Once the OTL is signed, then the landlord will then prepare the lease. When you sign an OTL you’ll commonly pay a deposit of one month’s rent.
Whether the OTL is binding on you will depend on how the document is drafted. If you have a change of mind, you may be able to pull out of the OTL and only forgo your deposit.
2. Legal and accounting advice
If retail legislation applies, then you must obtain advice from both a lawyer and an accountant and provide the landlord with certificates from your advisors. Even if the retail law does not apply, it is prudent to still obtain legal advice because every lease is different and will usually be drafted heavily in favour of the landlord.
Remember, there is always room for negotiation of troublesome clauses.
3. Due diligence and disclosure statements
Carrying out research (due diligence) before signing al is vital. The landlord will not guarantee that the premises are suitable for your business, so it is up to you to determine the suitability of the location and whether the rent is reasonable.
If the retail legislation applies, the landlord must provide you a disclosure statement which outlines various details about the premises and its location.
4. Timeframes
For retail leases, the landlord must provide its disclosure statement to you and a copy of the lease at least seven days before you sign the lease. A landlord will rarely give you access to the premises until the lease is signed, so always be mindful of matching the commencement date with that under your franchise agreement. Also be mindful of the disclosure and cooling off periods for franchise agreements under the Code.
5. Rent and outgoings
It is common for leases to have a set rent for the first year and then annual increases thereafter. The lease should state whether the increase is by a fixed amount, CPI (Consumer Price Index) or a review to market rent.
Outgoings are usually proportional, based on the floor area of the premises in relation to the whole building. If you are leasing the whole building, 100 percent of outgoings will be payable. A proportion will be payable for a store in a larger centre.
Rates, water access charges, waste removal and any other charges the landlord incurs in respect of the premises will be included in outgoings. If it’s a retail lease the landlord cannot bill you for land tax.
Sometimes the landlord will invoice you once it receives an account from the service provider, or might estimate the outgoings for the following year and invoice you by equal proportions monthly with rent.
6. Landlord’s legal costs
For retail leases, the landlord must pay its own legal costs for preparing the lease. If retail legislation does not apply, you will likely receive a bill for the landlord’s legal costs.
Remember, you can try to negotiate a cap on these costs when negotiating the lease. If the lease is to be registered on the Title to the property, this will usually be at your cost. Registration is vital to protect your interests for leases over three years in length.
7. Term of the lease
Leases are for fixed terms, therefore it is important to match the term with your franchise agreement. There will commonly be options to renew the lease for further terms. Be very mindful of the timeframe under the lease to exercise your option. If you miss the deadline then the landlord has no obligation to grant you a renewal option.
There will also be conditions applicable to exercising an option. The landlord might have the right to increase the rent and/or have you refurbish your store. Again, try and match up any refurbishment timelines with those under your franchise agreement.
8. Landlord’s approval
Because the landlord owns the premises always remember to first obtain their written approval before carrying out any changes. Most leases are strict and will require approval before starting any fit-out works, installing signs or even attending to a fresh coat of paint. Your franchisor may require a specific store design so ensure the landlord will agree to this before you sign the lease.
9. De-Fit
Never assume that you can just hand over the keys to the landlord once the lease ends. Leases will commonly provide that you must remove all of your fit-out and return the premises to the condition they were in when the lease originally commenced.
You may also be required to de-fit and return the premises to a bare shell. De-fits can be expensive, sometimes tens of thousands of dollars.
10. Representations
Finally, always ensure your entire agreement with the landlord is recorded in the lease. This includes any representations or promises made by the landlord which have had an impact on your decision to enter into the lease.