First-time property leasing: What you need to know as a commercial tenant

Commercial lease

Leasing a commercial property is similar in many ways to renting a house, but there are differences that can trip up a first-time lessee. Here’s what you need to know to get the best deal for your business.

Taking out a commercial property lease can seem daunting if you’ve never done it before, but it’s an exciting and often necessary step to take if you want to grow your business – and it doesn’t have to be a scary prospect.

How a commercial lease differs from a residential lease

If you’ve rented a house, you will find many similarities in leasing a commercial property. However, you should also be aware of some significant differences. Nicholas Farley, joint head of division for office leasing at Savills Australia, says the process of leasing a commercial property doesn’t have to be complex.

“It simply requires you to understand what you require, establish your budget, search for a property that suits and negotiate the best deal you can,” he says.

Tenants need to calculate how much floor space they require, and then search for the style, quality and location of the building that suits them. Talking to an active commercial agency that can provide details of available options will help you find the right commercial property for your business, as will searching online.

Farley says commercial tenants are given more respect and more power in negotiations than residential tenants.

“In the commercial sphere, tenants are a valued part of the process and there is an extra element of professionalism in the conduct of all parties. Tenants can negotiate for what they want, rather than having to accept all terms and conditions laid down by the landlord.”

Lease costs and incentives

Commercial leases comprise three main areas of cost:

  1. Net rental.
  2. Outgoings, or building operational costs.
  3. Cleaning.

The terms of the lease are all up for negotiation. When the net rental and outgoings are combined into a single figure, it is called ‘gross rental’. When they are separately quoted, it is a ‘net rental’. The difference is a reflection in the way the landlord runs the building, with the total costs paid by the tenant in each case.

On the other side of the ledger, most landlords will offer an incentive in the form of a rent-free period or contribution to fit-out costs. Commercial leasing is extremely competitive, and landlords are willing to make their buildings as financially attractive as possible, according to Farley.

“Depending on market conditions, incentives can range up to 40 per cent of a lease cost over the term.”

Other costs to consider

Farley says that when calculating your commercial property rental expenses, you should also consider some one-off costs that may apply.

“You will need to think about how much you will pay in legal costs, fees associated with setting up bank guarantees and insurances, and occasionally the tenant is responsible for the landlord’s cost of preparing the lease, so be sure to check whether that will apply in your situation.”

Adapting the property

If you wish to adapt a commercial property for your use, you will need written permission for any alterations you wish to make, and you are legally required to return the property to its original condition at the end of your lease term. Most owners are open to modification proposals, but be sure to check this before you sign a lease, otherwise you may be stuck with a property that is unsuitable for your business.

Any fit-outs are at your expense and you may also need to obtain council permits for any work you wish to do. In many cases, it is worth talking to a project manager to coordinate this process.

Breaking the lease

The landlord cannot break the lease. Even if the property is sold to another party, you are covered by the terms of your lease until its completion. However, they can offer the tenant some incentive to leave if they want the space back.

If the tenant wishes to leave the premises early, there are ways to do it.

“You are still obliged to meet all conditions of the lease, but you may be able to pass the lease on to a third party through a sublease arrangement. This will have to be approved by the landlord though. Alternatively, you can negotiate a surrender agreement with the landlord to pay a break fee and move out. This will depend on market conditions at the time and will at least cover all costs for the property to be advertised and leased out to a new tenant, as well as paying rent until the commencement of the new lease.”

Do you think a commercial lease could be the way forward for your business? Leasing a commercial property for the first time is a great way to start a new business or grow an existing one. It’s an exciting step to take for any business, and there is help available every step of the way.

You can take that first step by reviewing our commercial real estate for lease.