The Hidden Cost of Leasing
Most tenants enter into a lease considering rent, outgoings, services costs, lease preparation costs, rent reviews and other commercial terms, but often fail to consider the range of actual or potential costs that arise as a direct or incidental consequence of particular lease provisions. The 'hidden' costs that should be considered include:
Description of the premises - Greater levels of responsibility, risk and costs may be shifted to the tenant where a broader description of the premises is used. Responsibility for areas such as shop fronts and glass need to be carefully considered. A lease should only describe the area of the premises the tenant can actually use and will vary from lease to lease. The more widely the premises are described, the greater the tenant's maintenance and repair obligations, which can lead to increased costs and additional make good obligations.
Make good obligations - Tenants often enter into a lease considering the working capital and cost required to carry out the fit out of the premises, however fail to carefully review the provisions that take effect upon expiration or the earlier determination of the lease. The definition of premises, lessee's property and lessor's property should be carefully considered to ensure the tenant is aware of its obligations to remove particular fixtures and fittings from the premises and make good any damage.
The level of works required will vary from lease to lease. Some leases will require a tenant to remove all of its property except for a number of exclusions such as shop front, ceiling, flooring or internal partitions. However some leases will require that the tenant remove all of the fixtures and fittings from the premises, repaint, re-cover floors and even reconfigure the air conditioning to a base configuration. These costs should not be under estimated and can be significant.
Outgoings - The landlord will usually provide the tenant with an estimate of the outgoings for the current financial year and for retail shop leases in Queensland an outgoings breakdown in the landlord's disclosure document. Because of the type of costs included in the outgoings such as rates and other third party charges, the outgoings are likely to increase from year to year. This is often overlooked by tenants. The tenant should consider the possibility that rates, body corporate levies and electricity costs will increase from year to year, however the tenant will have little control over the increase of these costs.
Insurance - Tenants often overlook the insurance provisions in a lease and requirements as to which parties are to be insured and which parties are to be an interested party. Many landlords will require the tenant to also insure the landlord as opposed to noting the landlord as an insured party. Tenants should consider any additional costs which their insurance company will impose on them for ensuring that they comply with this obligation and the insurance requirements generally.
Landlord's costs - In commercial leases, tenants are generally obligated to pay the landlord's costs of and incidental to the preparation, negotiation and execution of the lease. In all leases the tenant is generally obligated to pay the landlord's costs associated with a request for consent under the lease or costs incurred by the landlord in relation to a breach of the lease by the tenant. All of these costs should be limited to 'reasonable' costs to ensure the tenant is not required to pay unreasonably high costs.
- Liabilities - All leases will contain release and indemnity provisions that allocate risk to the tenant. Tenants often overlook their responsibility under the lease. For example the lease may stipulate who is required to make insurance claims in particular circumstances and this can be an increased cost for tenants.
It is important that a tenant enters into a lease understanding the basic commercial terms of the lease, however it is equally important to consider all of the provisions of the lease and any ‘hidden costs’.
If you are entering into a lease or have a lease issue please feel free to contact a member of our Commercial Team to discuss.