04 Nov Case Examples – Leasing a business premises
About 15 months ago, John* wanted to open a new restaurant. While exploring venues, he came across a restaurant business for sale, which was in an ideal location and suited his lifestyle.
After a few discussions with the restaurant owner, John was confident he was getting a good deal. Why? Because the restaurant owner also owned the building and John was led to believe that he was practically only paying rent and getting the business for free.
John decided not to get legal advice before entering into this transaction! His attitude at the time was that he practically knew the seller, based on few meetings. The two most important points for John were that he was getting a good deal and the owner did not have any objections to John’s renovation plans.
John thought that nothing could go wrong. Well, it did!
Being a restaurant business, it was important that John was able to use the building for this purpose and in a manner suitable for his business.
However, less than one year into business, the owner tried to remove John from the building for various reasons, including:
1. John did not renew his lease term within a required timeframe, and
2. He caused serious damage to the building floor by installing a stove not suitable for the area.
John filed a claim in the NSW Civil and Administrative Tribunal to stop the owner. The owner, on the other hand, made a cross-claim against John for damaging the building. The owner also alleged that John carried out renovation works without council approval, hence the business could not operate until the damages were repaired as per council requirements.
If John had taken legal advice at the beginning of the transaction, he would have known about his lease term, about the requirement to get council approval for major renovation works, and whether the building was actually suitable for his business plan. Instead, John is now caught up in a legal battle and uncertain about the future of his business.
Alex* wanted to open a hairdressing salon and saw a shop that he absolutely loved. It was in a fairly new shopping centre with rather nice amenities.
By the time Alex came to see me, he had negotiated rent and lease terms with the property manager, signed a pre-lease agreement combining the negotiated terms, and was already drawing plans for the fitout. Alex, however had not considered other terms of a lease agreement; he did not even know the council rules and regulations for setting up a hairdressing salon.
Alex had one other problem: he was not happy with the cost of leasing the premises. Alex’s English comprehension is limited and he used a mate to negotiate rent and expenses with the property manager. After a chat with me Alex became aware of a few other expenses, which added to the cost.
The pre-lease agreement also did not include any special conditions about due diligence or council approval.
After I spoke to Alex about the premises, the council requirement and how the lease agreement operates, Alex wanted to renegotiate the lease. The property manager outright refused and instead told us that Alex had wasted his time for far too long.
I thought about the situation, and with some research and further consultation with Alex, I terminated the agreement on his behalf. The property manager initially disputed the termination, but after a few discussions he accepted it.
Alex is now the happy owner of a different hairdressing salon.
After a long search, Sam* found a premises in a location which he knew was perfect to start his restaurant business. It had previously been used as a café/takeaway shop, and the advertisement for the premises highlighted that it could continue to be used this way. The premises had a commercial kitchen, with a few other pieces of equipment available for use by the new tenant.
Sam was stoked by his find. He signed the pre-lease agreement after a brief negotiation with the rental agent. During negotiation the agent once again made representation that the premises had council approval for use as a café/takeaway shop. However, upon Sam’s request, the agent agreed to a special condition, which would allow Sam the time to check with the local council if the premises was permitted to be used as a café/takeaway business. Sam had a right to withdraw from the agreement, without any penalty, if this permission did not exist.
Sam brought the pre-lease agreement to me to help with the leasing process. As part of this process, I contacted the council to get information about the premises. After several communications with the council and inspection of various records, the council informed me that the premises did not have approval to be used as a café/takeaway business.
Sam had the option to terminate the agreement, but he really wanted the premises. I agreed to help Sam renegotiate new lease terms, including a substantial rent-free period to allow him to apply for council approval.
In the end, Sam was able to get council approval to use the premises as a café/takeaway shop and is now happily operating his business. Although this process took a few extra months, by exercising due diligence and a thorough negotiation plan, Sam was able to save time and costs down the track.
*Names have been changed for privacy reasons