FIJI LAW SOCIETYCONTINUING LEGAL EDUCATION COMMERCIAL LEASES PRESENTER: Anil K Tikaram
FIJI LAW SOCIETY
CONTINUING LEGAL EDUCATION COMMERCIAL LEASES PRESENTER: Anil K Tikaram
NEGOTIATING BEST TERMS…
RULE 1 Understand that the terms almost always favor the landlord RULE 2 Know that with a little effort you can almost always negotiate significant improvement to the terms
In theory, all terms of a lease are negotiable. But your negotiating power depends on whether your local rental market is hot or cold. If plenty of commercial space is available, you can probably win many landlord concessions. If your area’s rental market is tight, or you are chasing a unique space, you’ll have considerably less leverage.
UNDERSTANDING COMMERCIAL LEASES
Before you rent space for your business, be sure you understand these basic facts: Renting commercial space is a big responsibility Commercial leases differ from the more common residential variety Understand basic terms, such as the amount of rent, length of lease and the configuration of physical space.
DIFFERENCE BETWEEN COMMERCIAL AND RESIDENTIAL LEASES
Fewer consumer protection laws No standard forms Long term and binding Negotiability and flexibility
Commercial leases not subject to most consumer protection laws that govern residential leases – eg there are no caps on security deposits or rules protecting a tenants privacy. Commercial lease is normally tailor made to the landlord’s needs. As a result, you need to carefully examine every commercial lease offered to you. You cannot easily break or change a commercial lease. It is a legally binding contract, and a good deal of money is usually at stake. Commercial leases are generally subject to much more negotiation between business owners and landlord, since businesses often need special features in their spaces, and landlords are often eager for tenants and will to extend special offers.
MAKING SURE LEASE WILL FIT YOUR BUSINESS
Consider the amount of rent – make sure you can afford it Length of lease Think about the physical space Other less conspicuous items
Length of lease – You probably don’t want to tie yourself to a five or a ten year lease if you can help it; your a business may grow faster than you expect or the location may not work out for you. A short term lease with renewal options is usually safer. Physical space – If your business requires modifications to the existing space – eg adding cubicles, raising a loading dock or rewiring for better communications, make sure that you (or the landlord) will be able to make the necessary changes. Less conspicuous items – these can be as important as major items for instance if you expect your computer repair business largely on walk-in customers, be sure that your lease gives you the right to put up a sign that is visible from the road. Or, if you are counting on being the only coffee shop inside a new commercial complex, make sure your lease prevents the landlord from leasing space to a competitor.
CRITICAL LEASE TERMS
the length of lease (also called the lease term), when it begins and whether there are renewal options rent, including allowable increases and how they will be computed whether the rent you pay includes insurance, property taxes, and maintenance costs; or whether you will be charged for these items separately the security deposit and conditions for its return
Security deposit – normally security deposits on commercial leases are equivalent to two month’s rent or more. The common trend is rather than putting up cash is to provide a bank bond.
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exactly what space you are renting (including common areas such as hallways, rest rooms, and elevators) and how the landlord measures the space whether there will be improvements, modifications or fixtures added to the space; who will pay for them, and who will own them after the lease ends specifications for signs, including where you may put them who will maintain and repair the premises, including air conditioning systems.
Rentable space - this is very important as the landlord and tenant have sometimes different concept of what is a rentable space. It is not uncommon for the landlords to include common areas as part of rentable space and the onus is therefore on you as the tenant’s lawyer to ensure that your client only pays for the space that is being occupied. All leases are negotiable and is not set in concrete. Maintenance and repairs -There should be no dispute as to who is responsible if the air conditioning is supplied throughout the building being rented normally the landlord is responsible but confusion can arise where there are individual units and your client is renting a portion of the building. To avoid future dispute, the responsibilities for repairs and maintenance ought to be agreed to and documented at the outset.
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whether the lease may be assigned or subleased to another tenant whether there's an option to renew the lease or expand the space you are renting if and how the lease may be terminated, including notice requirements, and whether there are penalties for early termination whether disputes must be mediated or arbitrated as an alternative to court. VAT – this is tax which is over and above the actual rent and is normally recoverable provided both parties are VAT registered
Subleasing - Normally, the landlord will reserve the right to screen an assignee or a sub-tenant before giving consent. VAT –it is your duty as solicitor to ascertain that the landlord is in fact VAT registered and this can easily be done by asking for the landlord’s VAT registration details which can easily be verified through IRD. The tenant in order to be able to recoup VAT must also be VAT registered.
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Legal costs Guarantee
Legal costs - The normal trend in Fiji is the tenant pays legal costs as well as stamp duty. However, cost being a factor that is foremost in most people’s minds, particularly the tenant, the trend nowadays is to have each party pay own costs. The lease could also incorporate an agreement as to who pays the winner’s costs and fees if a disagreement ends in litigation. Guarantee – this is a promise that you will provide someone who will guarantee your financial obligations under the lease. This provision is not normally used in Fiji but one can see guarantee creeping into leases particularly where the tenant is a limited liability company whereby the landlord requires the directors on the company to guarantee the due performance of the terms and conditions. Most directors will not agree to giving a guarantee and this is something that you as a lawyer will need to negotiate with the landlord. One way of getting around a guarantee requirement is to increase the security deposit amount.
SUMMARY
This is a non-exhaustive list of matters you need to consider as a lawyer on behalf of a client who is about to enter into a commercial lease: 1. clarify with the landlord in writing all issues about the lease and the premises including: rent; outgoings; other obligations; permitted use and access; location and building design; insurance.
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2. things you would need to do: Check with your accountant the most tax effective way to structure the payment of rent, fit-out costs and VAT. Inspect the property and take notes and photographs prior to moving in. Talk to any other tenants - see how they get along with the landlord. Consider registering the lease with the Titles Office if it is for a term of three years or over, even if unspecified in the lease. File a copy of the lease in a safe place. 3. things to look for in the lease: all negotiated agreements are written into the lease. Put all the issues that arise during the term of lease in writing. If you and the landlord agree to a variation, make sure this is agreed to in writing. The lease should clearly identify the premises and all parties to the lease, the commencement and expiry date, plus any options for extending the period of the lease term.
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4. Questions to Ask Yourself Whether location suitable for client’s nature of business? Affordability of rent and whether increases can be sustained by the tenant? What is the length of the term of the lease? The longer the lease the higher the security, but the less flexibility if your client’s business expands or wants to move. Before Signing a Lease You should have detailed discussions with the landlord/solicitor and also seek advice from your client’s accountant. Obtain a draft lease and check for all the critical points earlier discussed.
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