Handshakes not enough when it comes to commercial leases!

03 Jul 2017

There are countless cases of business owners striking trouble when it comes down to leases for property. While our nature is often to accept a verbal proposal and build on a connection or acquaintance we have made in order to ‘strike a deal’, this approach leaves too much room for misunderstanding and can have serious consequences for business owners.
We were advised recently of a small retail business who entered into negotiations with a landlord for a commercial lease of a premises. The landlord agreed verbally and by way of a handshake that the business could take over the premises and that the detail of the lease could be agreed later.
Subsequently the retail business owner spent a lot of money fitting out the premises to reflect their brand and provide customers with a great experience. They moved in as soon as they could and the business traded well, until three months later when they were contacted by the landlord's lawyers who advised that they were terminating the lease with 90 days notice. This was on the basis that the lease of the premises was only a month-by-month tenancy, as there was no written lease in place.
This resulted in the business being required to vacate and ‘reinstate’ the premises. As there was no lease agreement in writing with the landlord, it was impossible for the business to argue that the tenancy was anything but a month-by-month or short term lease.
The business then had to spend a considerable amount in relocating their business and removing their fit out which caused huge disruption for the business and it's clients.

Two key tips to avoid getting caught out in a situation like the above when entering into a commercial lease

1. Make sure you record your lease arrangement and ongoing terms in writing
It is vital that any terms the parties agree to are recorded in writing.  Generally this is done by way of an Agreement to Lease, which is an agreement to enter into a lease. This includes key terms such as rent review dates, renewals, fit out, and any rent-free periods or early access. After an Agreement to Lease is signed, the parties will sign a Deed of Lease which records in detail the rights and obligations of both parties.

2. Prepare a Premises Condition Report
When taking on a new lease or assigning a lease, we recommend that the parties prepare a ‘Premises Condition Report’ as this avoids arguements at the end of the lease as to the original condition of the premises. This records the condition the premises were in at the date the lease began and it is good idea to take photos as part of this exercise. This report is attached to the lease documents.

Entering into a lease is a major commitment and there are a number of areas where the unwary can be tripped up.

The PKF Carr & Stanton team are well versed in supporting business owners negotiate and secure leases so please feel free to contact our office early in the process to ensure that you achieve a good outcome.

Article by Aaron Tyro, PKF Carr & Stanton Associate.