04 October 2022

Commercial leases can be extremely intimidating and – unlike residential leases – offer very little in the way of built-in protection for tenants. 

Craig Mott, Business Development Manager for the Rawson Property Group, shares the important points that commercial tenants overlook, and how you – and your business – can avoid them.

1. Choosing the wrong location

“Location, location, location” isn’t just a residential property mantra. It’s key for a successful commercial lease, too. 

“Every business needs something from its location,” says Mott. “For some, it’s easy highway access. Others need public transport. Some rely on passing foot traffic while others prefer an exclusive customer base. Whatever your needs are, your location has to support them. Even the most favourable lease can’t make up for a location that simply doesn’t have what your business needs to thrive.”

2. Misunderstanding the physical space

With the increasing popularity of flexitime, remote- and hybrid-workplace setups, it’s not always easy to know how much space your business requires. To make things even trickier, the breakdown of commercial rental spaces isn’t always standard, either. According to Mott, some landlords measure area from inside wall to inside wall, while others include the walls’ depth in their measurements. Some measurements also include common spaces, while others list these separately.

“It’s also important to understand the layout of the space you’ll be getting and what may need to be done to it,” he says. “Some commercial spaces need full build-outs, while others need very little modification. That can make a huge difference to immediate affordability, unless you negotiate for your landlord to cover the costs.”

Pro tip: Don’t forget to ask about signage – certain commercial properties have limitations on the display of signage which can be problematic for businesses that need high visibility.

3. Not considering all the costs

Rent and fit-outs may be the main costs commercial tenants consider, but they are far from the only possible property-related expenses.

“Check whether your business will be liable for things like rates and utilities or repairs and maintenance, or if those fall under the landlord’s responsibilities,” say Mott. “Also make sure any rental escalation clauses in the lease are reasonable and market-related. A good deal now doesn’t automatically guarantee a good deal in the future.”

4. Underestimating the importance of flexibility

If there’s one thing we know for certain, it’s that nothing in life – or business – is guaranteed. With that in mind, Mott says it’s always a good idea to lock as much flexibility into your commercial lease as possible.

“Shorter lease terms are usually less risky, giving you an earlier out if your circumstances change,” says Mott. “If you do opt for a longer lease term – often available at a more favourable rate – make sure there’s a fair breakaway clause with reasonable termination processes and no overly punitive cancellation penalties.

“It’s also worth checking if the option to scale up, scale down or sublet is on the table,” he adds, “as well as locking-in ‘first right of refusal’ at lease renewal time, if possible.”

5. Not protecting future rights

Disputes are not uncommon in commercial real estate. Mott encourages tenants to make sure a mediation clause is included to keep disputes out of court.

“It’s also a good idea to include clauses protecting your business against undesirable or competing neighbours,” he says. “The last thing you want is your direct competitor moving in next door, or a liquor store opening up opposite your branch of Alcoholics Anonymous.”

6. Taking things on faith

No matter how easy-going the landlord or property manager, Mott says it’s essential that every element of a commercial rental agreement is included in the lease.

“There’s no such thing as a verbal contract in commercial property,” he says. “If it’s not in black and white and signed by all parties, it may as well not exist. I strongly encourage getting a commercial property professional – either a lawyer or a commercial real estate agent – to look over your lease documentation before signing it. That’s the best way to ensure all the necessary protections are in place with no remaining red flags or grey areas.”

7. Not negotiating

Commercial leases are not standard documents. That means anything and everything can be up for negotiation – as long as you know what you’re doing, that is.

“Commercial landlords and their representatives are real estate professionals,” says Mott. “They know exactly how to play their cards during negotiations to achieve the results they’re aiming for. That said, tenants are in a very strong position right now, and are getting great deals when they use the right strategies – particularly when they’re supported by experienced commercial property professionals.”