Setting Off a Commercial Kitchen in Melbourne or Sydney? Know the Leasing Rules First!
Your dream foodservice business needs the right address, and leasing is naturally the way to acquire the space unless you own it already. However, before you plan to lease a commercial property, it is essential to be aware of the leasing rules in your area. Leasing commercial kitchen equipment is also an option to minimize the initial expenditures, but it comes with its share of limitations.
The leasing rules vary considerably for residential and commercial properties. Being aware of what you are getting into is essential not only to prevent the risk of unpleasant surprises but also to ensure the future of your business. Here are some of the most critical points of leasing rules that you should know before entering the contract.
What is a commercial lease agreement?
A commercial lease is a legal contract that gives certain rights to the tenant over a particular property for a specified period subject to the terms and conditions included in the contract. Typically, the agreement is prepared by the property owner and signed by both the parties to enter a legally binding contract. You should read the document carefully before signing it and may consult an experienced lawyer as per need.
Lease duration and renewal
The term of the proposed contract is a crucial factor, and a longer-term is always preferred. The duration should be sufficient to recover your investment and strike a profit margin. If you are serving your customers on-site, the goodwill of your business might depend on the location as well. After the duration of the contract, if the owner is not under any obligations, he might opt for alternative tenants, which will harm your business. So, before getting into the contract ensure that the proposed lease has a clear renewal option.
For new businesses opting for a short initial term, maybe for a year followed by short renewal options of two-years can be helpful. For established businesses, negotiating a longer-term, such as a two-year period followed by a three year and a five-year renewal option is appropriate.
According to the Commercial Tenancy (Retail Shops) Agreements Act 1985 (CT Act), a tenant leasing a retail shop should have a minimum tenancy period of up to five years. If the contract does not cover the period, a tenant can extend the duration under the act by following certain legal procedures.
Rent and review
Negotiate the rent with the owner before finalizing the agreement. Typically, the rent is calculated on the square foot area of the space. Be cautious and make sure that your rent is decided on the actual area you will get to use.
Rent review is another critical aspect to be included in the contract. The annual, percentage-based rent increase is most common in commercial lease agreements, but you can negotiate for a longer review period or a different review term. A rent review on the percentage of turnover, though most common, will require you to disclose all details of your turnover to the landowner, which might be used against you in future.
Before getting into the contract, make sure that you can afford the proposed rent increase from time to time, which can turn to quite a sum over the years.
Repair and maintenance
The obligations of the property owner and the tenant regarding repairing and maintenance should be clearly outlined in the document. In most of the commercial leases, the tenant holds the responsibility of maintaining the rented premises, including floors, fixtures, and walls. You are naturally responsible for the repairing and maintenance of any equipment like the commercial refrigeration or the gas cooktops that you may buy for your kitchen.
Repairing of the structural parts and major expenditures come under the responsibility of the property owner. The landlord is responsible for repairing and maintaining the roof, building structures, lifts, different building systems like the fire extinguisher, water, and electricity supply – but often these responsibilities are not explicitly mentioned in the contract.
More often than not, the dispute arises in particular, to interpret terms like ‘maintenance’, ‘repair’ and ‘structural. While ‘repair’ is typically defined as a necessary act to fix something that has been damaged accidentally or due to continuous use; ‘maintenance’ outlines taking some action that delays wear and tear, deterioration or damage of an item. The responsibilities of the landlord and the tenant regarding repairing and maintenance must be clearly mentioned in the document to avoid any future disputes.
Transferring and sub-leasing
While starting a new business it might look unnecessary to focus on this clause, but it can turn out to be most important if there are changes in plan in future, which is quite common. In case you decide to sell the business, or you cannot continue to operate, or you want to relocate, you will need to assign the lease to the buyer of your business. An existing, long-term lease can also make your business more lucrative to the buyers.
However, you need to take the landlord’s consent before any transfer or assignment of lease. So, make sure that according to the contract, the landlord cannot withhold their permission without showing a proper reason. Even after you have assigned the contract to the new tenant, you might be liable in case the new tenant defaults. The leases covered by the CT Act gives automatic protection to the tenant, and for the ones not covered by the act, it is essential to ensure that you are not liable for any action of the new tenant after the assignment date.
In the case of sub-leasing, you are fully responsible for the lease and should manage the sub-leaser as your tenant. If the CT Act regulates the agreement, you should provide appropriate documentation to the new sub-tenant before he starts operation.
Apart from the above, the following clauses of the commercial property lease should also be verified minutely,
Permitted use
If a property lease comes with a ‘permitted use’ clause, it might severely restrict your operations. Check it minutely and also consider any future expansion of your business before agreeing to the clause. For example, if the contract specifies the use of the property for an ‘ice cream parlour’, you will not be able to extend your menu list even to the quick grabbing fast foods like pizzas and burgers, which can severely impede your business growth.
Redevelopment
The redevelopment clause gives the owner the right to terminate the agreement early on the ground of renovation and redevelopment of the property, forcing you to relocate. If possible, negotiate to have the clause removed from the agreement. If that is not possible, arrange a clause of suitable compensation in the contract because relocation can be damaging to your business. If neither of the two is possible, you should consider not entering the lease at all.
Tenancy competition
If you are leasing the property in a shopping centre, negotiate to include the “exclusivity of trade” clause. This clause prohibits the owner from having another tenant who might pose competition to your business.
To run your foodservice business smoothly, after the property comes the equipment you will need in the kitchen and catering. So, now let us take a quick look at leasing the kitchen equipment for your business.
Leasing commercial kitchen equipment
Renting the equipment for your kitchen might look like a good option when you are starting a new business and is under a strict budget, but it has some limitations. You might not get the latest equipment on lease, leading you to depend on outdated technology and design.
The rented appliances are often not in their best condition, forcing you to compromise on efficiency. If you are leasing equipment for your restaurant or food joint, get it from a reputed commercial kitchen equipment supplier to avoid any future issues.
Certain conditions might lead to untimely termination of the lease. These include but are not limited to,
- Failing to pay the rent on time
- Failing to undertake specific requirements related to repairing and maintenance
Make sure that the contract includes a clause specifying that in case of any default, you must be given a written notice and sufficient time to rectify the breaches before any action can be taken against you.
