Understanding the costs of leasing

Rent, fit-out, outgoings, insurance and other items to consider

It is important to be aware of the costs and risks of leasing and incorporate these into your business planning. Seek independent advice from a retail leasing expert, accountant, solicitor or others before signing your lease.

The main costs of leasing are:

1. Lease preparation

The lessor must pay the full cost of preparing the lease, including any mortgagee consent fees. However, if the lessee asks for changes after the signed Lessee’s Disclosure Statement has been returned to the lessor, the lessee may be required to pay for those amendments. For guidance on preparing the lease, see preparing the lease.

2. Fit-out

Lessees will usually be responsible for the costs of installing fixtures and fittings in the premises (the fit-out). In shopping centres, there is usually a standard of construction required for fit-outs. Lessees may also be responsible for some or all of the lessor’s costs of preparing the premises for the fit-out. The Disclosure Statement must state who pays these costs. Lessees must agree to the maximum cost of the lessor’s fit-out costs in writing before beginning the lease. Depending on the cost of the fit-out it may be worthwhile to have an independent certified quantity surveyor verify the costs associated with preparing the premises for fit-out. The lessor and lessee will need to consider/agree who is to pay for any surveyor.

3. Rent

Rent is one of the largest ongoing costs of running a business and is normally paid monthly in advance. Even if a lessee experiences financial difficulties, they must still pay the rent and use the premises only for the business stated in the lease.

4. Changing the rent

The initial rent under a lease is commonly referred to as base rent. The lease must state when and how any change to the rent is to occur. If the lease says the rent is set at current market value, and the lessee and lessor cannot agree on the rent, then the Act provides a process for a specialist retail valuer to determine the rent. The NSW Small Business Commission appoints the valuer and the lessee and lessor share the costs equally. These costs can be upwards of $1,500 per party, however, and will vary depending on the valuer and matter. If either party seeks a review, then both parties may be required to pay for the costs of a further two valuers.

5. Outgoings

Outgoings are expenses of the lessor that the lessee has agreed to pay under the lease. They are usually major costs for the lessee. Lessors are entitled to recover fees for management, operation, maintenance or repair of the premises or land as part of the outgoings. Outgoings may include things such as land tax, cleaning, security, promotional fund levies, council rates, water charges, utilities, insurance, pest control, emergency services levy, management fees and audit fees. The outgoings should be included in the Disclosure Statement and it is important you understand these before signing the lease. Undisclosed outgoings might not have to be paid. Outgoings can go up by market rates over time. For more information, see what are outgoings.

6. ‘Make good’ and end of term provisions

‘Make good’ provisions set out the obligations of the lessee before the lease ends, if any. Typically, these provisions require a lessee to return the premises to the lessor in a similar condition to that at the start of the lease. In some cases, make good involves a requirement for a lessee to strip back the premises to base building (or bare shell) condition and redecorate the premises (e.g. re-paint). It is important to agree to these provisions before signing the lease and use a condition report to document the condition of the premises at the start of the lease. You could also include a provision that an independent certified quantity surveyor may be engaged to determine any make-good costs. Retail leases often include a clause which stipulates that where the lessor and lessee cannot agree on the ‘make good’ costs, the President of the Australian Institute of Quantity Surveyors, or another industry body, will nominate an independent certified quantity surveyor to make a binding determination about these costs.

7. Insurance

The lease may include a provision requiring the lessee to take out certain insurance policies. Check these provisions and obtain a range of quotes for any required insurance policies. For information on insurance claims, see quick guide to making insurance claims

8. Security

The lessor may ask for some form of security when negotiating the lease. This security may be: (a) a cash bond; (b) a third party guarantee, or (c) a bank guarantee. For further guidance on bonds, see Retail bonds: lease security

8a. Cash bond

If the lessee agrees to give the lessor a cash bond as security, the lessor must deposit the bond with the NSW Small Business Commission within 20 business days of receiving it by using the retail lease bond lodgement form.

The main advantages of a cash bond are: it is held in trust by the NSW Government; there are no fees; it is for a specified amount; and there are rules for paying out the bond at the end of the lease. 

8b. Third party guarantees

This is a promise by a guarantor to pay the lessor compensation if the lessee breaks any of the terms of the lease. Be aware that if you personally guarantee a lease, the lessor can sue you for damages should the lessee default and you could personally lose assets or be bankrupted.

8c. Bank guarantees

This is a promise by your bank to pay the lessor an amount in compensation up to an agreed limit if you break the terms of the lease. If you have given a bank guarantee as security, agree in writing when it will end. The lessor must return the bank guarantee within two months of when you leave the premises unless you owe them money.

9. Valuation

Lessors and lessees may wish to get a valuation on the premises to check its market value. This can be done by hiring an expert valuer or by accessing specialist software. This will incur a cost.

10. Key money

A person must not seek or accept key money under the Act. The Act defines key money as any sort of non-refundable benefit, usually money, that the lessor asks for in exchange for the granting, renewal, extension or assignment of a retail lease.