February 2017

The perfect space, but is it the perfect lease?

So you’ve found the perfect space to lease for your business but it involves taking over the lease from an existing tenant. What are some things you should consider before signing the lease?

The agent procuring the deal has probably told you to just sign the lease. It’s not like you can change anything in there anyway, right? Wrong!

The agent may be correct in that it is unlikely the landlord will agree to any amendments to the lease given that they struck the deal at an earlier time with the existing tenant, and it is unlikely that they would want to disrupt the status quo. However, you will never know unless you ask. Ask the agent whether you can put forward a proposal to the landlord seeking a different commercial deal, or a variation of the terms of the lease. It may be that if the landlord is receiving a benefit from this, they may in fact agree to the changes you are seeking. So, for example, if you want to seek to change the make-good obligations at the lease end, a landlord might be more inclined to allow this to occur if the term of the lease or the rent being paid were to increase. Think of it as a tit for tat.

However, in a situation where the landlord flatly refuses to make any changes to the lease, don’t despair because it’s not the end of the road yet. You’ve been dealing with the departing tenant, so it is more than appropriate to negotiate the terms of an agreement with them. Thus, the impact of an onerous or unusual provision in the lease could be diffused by seeking reimbursement from, or compliance by, the departing tenant.  

If this option is to be pursued, steps should be taken to ensure as far as possible that any agreement with the departing tenant is actually complied with and can be enforced if necessary.  For example, where the departing tenant has agreed to reimburse an expense, that agreement is only as good as the departing tenant’s ability, and preparedness, to pay.  If time has passed, you might also be faced with the reality that the departing tenant cannot be found or has been deregistered in the case of a company.

The biggest trap you could fall into is taking over a lease from a departing tenant without understanding what obligations you are taking on and what liability you may be assuming. You could be in for a big surprise during the lease term or at lease end if you haven’t spent the time obtaining legal advice at the outset.

An example of such an issue arises where a tenant takes over a lease with onerous make-good obligations. It’s likely that as you weren’t around at the commencement of the lease, you will have trouble identifying your obligations at lease end unless you ask the departing tenant to provide you with these details. You should ask what the state of the premises were if the lease requires you to make-good to the same state of repair at the commencement of the lease, and obtain copies of photos, inspection reports and any other available documents that evidence the state of the premises at the time.  A signed statement from the departing tenant referencing these documents would also be useful, as the departing tenant may be unavailable or unwilling to assist when you need that help.  You would also want to know such things as what is to happen with the fitout and who in fact owns the fitout. Such considerations could be the difference between having struck a reasonable deal and one that ends up costing you thousands.

Another example arises where a departing tenant may have received a rent incentive as a lump sum at the start of the lease but you won’t be entitled to any of that as the payment has already been made.

These matters require careful consideration before signing any agreement to take over an existing lease. A carefully reviewed lease document and a prudent consideration of matters that may impact you as an incoming tenant will allow you to have a proper understanding of what you are assuming from the outset and the additional costs thay may arise. It will also allow you an opportunity to negotiate the terms between you and the departing tenant. The negotiated terms can include such things as a contribution for the cost of make-good for the period of the lease term you are taking over as a proportion of the total lease term. You and the departing tenant are at liberty to negotiate whatever terms you like, so where you are taking over a particularly onerous lease, you should obtain legal advice to seek to obtain some form of contribution from the departing tenant, or to hold the departing tenant liable for things that occurred prior to the date of assignment.  

As indicated above, it is also important that any agreement entered into with the departing tenant is prepared with a view to maximising compliance and enforcement so that you actually receive what you bargained for if you need to rely on it.  As a general rule, if you can obtain what you need up front then that is the safest way to proceed.

So if you find the perfect space, but not the perfect lease, don’t despair. There are ways to lessen these onerous obligations and liabilities on you by negotiating with the departing tenant. We suggest obtaining legal advice at the very outset of any such agreement. The property team here at Bartier Perry are particularly experienced at advising on such issues from both a legal and commercial perspective. Contact us today.

Authors: Bruno Confalone & Gavin Stuart

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