A great many of you would know the Lord of the Rings meme, "One does not simply walk into Mordor". If not, we suggest you Google it! Because, "One does not simply lease a premises for a start-up practice".
To begin with, a suitable premises is found, you have inspected, and the leasing agent has provided you with a heads of agreement, lease proposal, offer to lease (or whatever leasing agents wish to proffer to you) (preliminary agreement). The preliminary agreement provides the basis for the lease you will be subsequently entering into. Unfortunately for you, the preliminary agreement is nearly always drafted in the landlord’s favour and frequently lacks the fundamental terms and conditions as follows:
- satisfactory finance (conditionality of finance);
- dealing with town planning;
- amending or applying for new unconditional town planning permits;
- satisfactory access to the premises and occupancy certificates;
- applying for building permits; and
- satisfactory landlord/management/body corporate approval.
Satisfactory finance
Your finance team, likely, has their own conditions to formal finance approval. You need to ensure that your preliminary agreement is subject to those satisfactory finance conditions. Drafting is paramount for finance clauses, and it is not as simple as inputting 'subject to finance'. It is the finance clause drafting details that count toward its enforceability!
Town planning
Before even inspecting the premises, we suggest potential tenants commence their interim town planning due diligence on the premises by requesting the current town planning permit from the leasing agent. If the leasing agent is reticent in providing the town planning permit, go to the local council and obtain information about the premises, and explain exactly what you are planning at the premises (for example, two (2) practitioners practising at the one time, unconditional on operating hours etc).
After you have completed your preliminary planning due diligence, some likely formal planning responses are:
- the premises town planning permit is adequate (allows two (2) practitioners practising at the one time with unconditional operating hours); or (more commonly)
- you are told the existing premises town planning permit is incompatible with your leasing requirements, and you are told it may take 60 - 90 days to amend the permit to your requirements, what next? You will need to inform the leasing agent, who, if representing the premises as a viable location for a health practice, may need a commercial reality check on lease commencement date timing.
Remember, the leasing agent represents the landlord, Whitehead Legal represents you (as tenant) and insisting on appropriate town planning compliance is industry standard and of paramount importance. Do not be pressured into signing the preliminary agreement before obtaining proper legal advice.
Other interested parties and FOMO (fear of missing out)
Whilst it is difficult to, at times, not fall in love with a premises straight away, be commercial as there are many out there and you really need to scrutinise your premises thoroughly. Every landlord wants their premises lease to commence tomorrow! Understandable, but you are investing significant time, engaging your own consultants and borrowing significant amounts of finance to fitout the landlord's premises.
Your preliminary agreement and lease must be subject to the new/amended town planning permit with the appropriate town planning conditions, along with the remainder of the above 6 points.
Satisfactory access and building permits
Your builder will need access to the premises and your preliminary agreement needs to foreshadow an access period for your builder, along with conditionality of a building permit. If your builder is unable, for whatever reason, to attain a building permit for your premises fitout, you need the ability to withdraw from the preliminary agreement.
Landlord and body corporate approval
What happens if you cannot agree to the design of your premises fitout with your landlord? Or if the landlord is imposing unreasonable conditions on your design? Or if your signage or advertising is reasonable, but not acceptable to the body corporate? It is common for landlords to have some input on your fitout, however, we are aware of horror stories whereby the landlord tenant relationship has broken down at the design stage – and, subsequently, the tenant wants to withdraw. Ensuring that your preliminary agreement has reasonable and satisfactory conditions assists in your design negotiation as the landlord holds less leverage over you.
We recommend that your preliminary agreement includes a sunset date of 60 - 90 days, meaning you have 60 - 90 days as a period of time from sighting the landlord’s signature on the preliminary agreement to complete the above 1 - 6 points, and then, and only then, will your formal lease commence.
Your leasing terms
Common negotiable terms are rent, rent and outgoings free periods (from the commencement date), removal of demolition/relocation clauses, security deposit/bank guarantee, promotion/marketing levies, further terms and rental review, outgoings and landlord’s contribution to fitout expenses. You should ask for a detailed list of the estimated outgoings.
We usually seek to remove in your preliminary agreement any requirement for the tenant to pay any:
- lessor’s consultancy costs; or
- managing/leasing agent’s fees; or
- non-refundable amounts.
The path to signing your preliminary agreement and formal lease documentation
Once your preliminary agreement is satisfactorily amended, we usually request the landlord's lawyer (not the leasing agent) to confirm that the preliminary agreement terms and conditions are fully comprehended by the landlord. This is particularly important if the landlord's lawyer uses their own form of lease (particularly in shopping centre premises), rather than the lease recommended by your State Law Institute, and also to ensure all representations made by the leasing agent are valid.
We have, at times, negotiated in good faith and signed the preliminary agreement with the leasing agent, only to find the landlord’s lawyer advising the landlord and drafting against already agreed terms – landlord's lawyer confirmation keeps the leasing agent accountable for representations made to you.
All parties then sign the preliminary agreement and your interim 60 - 90+ day period begins, upon which we contemporaneously request further due diligence (if necessary) and the formal lease documentation from the landlord's lawyer.
Formal lease documentation
Expect to receive:
- a lease (incorporating your agreed preliminary agreement terms);
- an agreement to lease if you are starting up at a site where the building and premises is yet to be built;
- and depending on your State’s statutory disclosure requirements, a disclosure statement.
It is important that the preliminary agreement and lease is clearly negotiated and documented. Whitehead Legal can provide the proper protection for a start-up tenant.
Contact Whitehead Legal via the Credabl Partner Hub to see how Whitehead Legal can help with your practice legal checks.
Julian Whitehead is a partner at Whitehead Legal. He exclusively advises health care professionals in their commercial matters throughout Australia.
