A Quick Guide for Industrial Lease Tenants: What to Consider Before Signing a Lease
A Quick Guide for Industrial Lease Tenants: What to Consider Before Signing a Lease
Remember – an agreement to lease can be binding and oblige you to forfeit a deposit if you change your mind about the lease. Get advice before you sign anything.
1. Define Your Needs and Objectives
Before you start searching for industrial space, it’s essential to have a clear understanding of your needs and objectives. Ask yourself:
- Space Requirements: How much square meterage do you need for your operations, and how will you use the space efficiently? Do you have space to expand and what if you want to contract?
- Location: What is the ideal location for your business? Consider zoning, proximity to suppliers, customers, transportation hubs, and workforce availability. Consider past flooding or bush fire events for the location.
- Budget: What can you afford in terms of rent, utilities, and other operating costs? Establish a budget and stick to it. Lease costs increase every year so it is important to consider a worked example of what your rent and outgoings will be at the end of the lease, not just the beginning.
- Lease Term: Determine the length of the lease term that aligns with your business goals. Industrial leases can vary from short-term to long-term agreements and while a holding over might work for some tenants, and month by month lease may not provide sufficient time to vacate cost effectively if, as the tenant you have to get out.
2. Location and Accessibility
The location of your industrial space can significantly impact your business. Consider that some areas are not accessible by all types of vehicles and might have high vehicle or heavy load detours. Planned future road works, particularly major works like road widening or installing traffic lights can hinder access for months. Review:
- Zoning and Land Use: Ensure that the property is zoned for your intended industrial use. Check local zoning regulations to avoid complications later. Keep in mind that city fringe areas may be subject re-zoning over time.
- Proximity to Transportation: Evaluate access to major highways, ports, railways, and airports, especially if your business involves shipping and logistics.
- Local Amenities: Assess the availability of nearby amenities, such as restaurants, hotels, and retail, which can be beneficial for employees and business operations. Accommodation at a port might be handy for logistics and inappropriate for accommodation of your office staff.
- Labor Pool: Consider the availability of skilled labour in the area, as this can impact your ability to hire and retain employees. Transport accessibility might also be an issue if your potential labour pool can’t get to you easily, or there is no where for safe parking.
3. Types of Lease Payments
Industrial premises might be located in an estate owned by one landlord or developer, or stand alone, and this can affect the different types of outlays payable by tenants.
It is not unusual in industrial and commercial leases for the tenant to be responsible for all costs associated with the property, other than capital costs. This can include things like security details, management rights, landscaping teams etc. It is important to understand the extent of costs payable on top of the rent.
Outlays are generally estimated in advance and paid monthly, then reconciled at the end of the financial year with any overpayment amortised against the next outlays invoice, and underpayments invoiced as an additional fee.
4. Lease Terms and Flexibility
Pay close attention to the terms and flexibility of the lease:
- Lease Duration: Consider whether a short-term or long-term lease aligns better with your business strategy. Longer leases may provide stability but could limit flexibility.
- Renewal Options: Check if the lease includes renewal options, which can be essential for long-term planning and avoiding the hassle of relocating. For a newer business, a shorter initial lease with longer options might enable the business to become established without the pressure of a long lease, and for older premises, a longer initial lease with shorter options might provide the necessary flexibility to look for an upgrade in premises when the lease ends.
- Exit Strategies: It is not unusual for a commercial or industrial lease to be inflexible around exit, providing the landlord with options, but not the tenant. If your business is expected to change as it grows, consider what factors might mean you have to change premises to remain viable and request appropriate provisions for the lease to ensure that flexibility. Changing from a predominantly domestic to a predominantly export market might mean a need to shift location.
5. Rent and Operating Costs
Understanding the costs associated with the lease is crucial:
- Base Rent: When you create your budget for leasing premises remember that the base rent is only the beginning of calculating your costs and if it starts to high, you put your business under pressure. Budget conservatively. Determine the base rent and any escalations over the lease term. Escalations typically include:
- annual fixed percentage increase or
- annual CPI increase and
- timed market reviews
It is highly unusual, but not unheard of, to have rental fixed for the whole of the term of the lease, payable in equal monthly instalments – much like payday lending. Your percentage increase is disguised behind predictable monthly payments.
- Outlays: Clarify your responsibility for outlays, which are costs incurred by the landlord and payable by you. They can include almost every cost associated with the land, including rates, taxes, insurance and management fees, or may be limited to a fixed category of costs identified in the lease. These costs can vary widely, so negotiate terms that align with your budget.
- Operating Expenses: You will have all your usual expenses for operating and maintaining industrial premises including necessary utilities, telecommunications and internet access. For new premises you may need to check that those services have already been connected, or require installation.
- Security: It is rare to enter a lease without providing at least one form of security. This can be by bank guarantee, personal guarantee or security bond paid in cash. Find out the amount of the security deposit required and the conditions for its return. Open ended bank guarantees should not be offered, and should have an expiry date no more than six years after the end of the lease term to match the statute of limitations.
6. Property Condition and Maintenance
Inspect the property and understand your responsibilities regarding its condition and maintenance. It sounds simple and logical but just with people who buy houses without building and pest inspections, businesses go into leases without thorough checks.
- Property Inspection: Conduct a thorough inspection of the industrial space to identify any existing issues or necessary repairs. Document these and negotiate necessary repairs with the landlord. In the rush to get into premises these inspections can be missed and become a problem only after the lease has started and the tenant has been in the premises for a while. Drains partially block by tree roots can become the tenant’s problem rather than the landlord’s if not identified at the beginning of the lease. Keeping pipework clear and functioning is usually the obligation of the tenant once the lease starts.
- Maintenance Obligations: Clearly define maintenance responsibilities in the lease agreement. Determine who is responsible for routine maintenance and major repairs. This is particularly important for things like fire safety equipment. If the responsibilities are not clear in the lease and there is a failure during a fire, or a malfunction causing damage to stock, no only can there be an argument about responsibility, but there can also be a failure in insurance cover if the equipment didn’t meet minimum regulatory maintenance requirements.
7. Environmental Compliance
Industrial properties often have environmental considerations:
- Environmental Regulations: Ensure that the property complies with all relevant environmental regulations, especially if your operations involve hazardous materials handling or a product that can travel past the boundary of the property like – water, soot, sand, smoke, paint overspray etc.
- Contingency Planning: Ensure you have all necessary contingency plans documented for compliance and to minimise risks. Understand the impact of neighbouring properties.
8. Fire Safety and Equipment
Safety should be a top priority:
- Fire Safety Systems: Verify the condition and functionality of fire alarm systems, sprinklers, extinguishers, and emergency lighting. Non-compliance with safety regulations can lead to legal issues.
- Safety Inspections: Establish a schedule for regular safety inspections and ensure that both you and the landlord are aware of your respective responsibilities.
9. Infrastructure and Utilities
Consider your infrastructure needs:
- Infrastructure Development: If the property is still under development, understand the timeline for infrastructure development, including roads, utilities, and access.
- Utilities: Ensure that utilities, including water, electricity, and internet, are connected and meet your operational requirements.
- Contracting and Expanding Space: Do you have the flexibility to grow or shrink with market demand? In complexes where there are adjoining units you may have the ability to negotiate the acquisition or leasing of neighbouring units for expansion. Is there the possibility of building a mezzanine in the premises to meet your future growth? If so, will the increase floor meterage increase your rent?
10. Lease Negotiation and Legal Advice
Finally, don’t underestimate the importance of lease negotiation and legal advice:
- Professional Assistance: Engage a qualified lawyer experienced in industrial leases to review and negotiate the lease terms on your behalf. Commercial agents act in the interests of the landlord they represent and who pays them a commission on getting the premises leased. They are unlikely to prioritise your interests over those of the landlord and may seek to trivialise aspects of a lease or the premises that can have a significant financial impact for the tenant once the lease starts.
- Negotiate Terms: Be prepared to negotiate terms and conditions to ensure the lease aligns with your business objectives and safeguards your interests. Be aware that timeframes can be subject to significant change if an industrial property is still under development. There can be years between getting approval to build a new industrial estate and actually having buildings available for a tenant to move into.
- Due Diligence: Conduct thorough due diligence on the property and the landlord to ensure a smooth and reliable leasing experience. Ask if there are any thoughts or plans for sale, refurbishment or further development in the future.
Seek professional guidance when needed to navigate the complexities of industrial leases, and don’t hesitate to ask questions and seek clarifications during the leasing process. Your choice of industrial space can have a profound impact on your business, so choose wisely and confidently.