The importance of choosing the right lease term
When it comes to leasing a commercial property, it is easy to believe that the hardest part is finding the right premises. However, there are many important factors to consider once you are ready to enter into a lease agreement. Chief among these is securing the right lease term. The decision to pick a long term lease versus a short term lease is important as it can impact business operations and financial stability as well as your growth plans for your business. Find out more about the pros and cons of leasing long term or short term.
What are long term and short term leases?
At the outset, it is important to understand the difference between the duration of a long term and a short term lease. Generally, a short term lease is a term of less than three years, while a long term lease can range from five to ten years. There may be many reasons why some tenants and landlords prefer short term leases over long term leases or vice versa, but it’s important to understand the pros and cons of each type of lease before signing a tenancy agreement.
What are the pros and cons of long-term leases?
Long term leases are generally considered to last anywhere from five to ten years. With the lease spanning a longer period of time, tenants can be more secure in the knowledge that they have the stability to establish their business over that period. Long term leases can also be preferable for business owners because of the potential cost savings with rental discounts and the ability to secure more value for money out of a property fit out. In a tightening rental market, such as Brisbane, locking in a good rent deal now for a longer term can protect you for a time against rental price escalations. A long term lease may also be attractive if you’ve found the ideal location for your business and don’t want to risk giving it up for a lesser alternative.
However, despite the many advantages, there are some potential disadvantages to signing a long term lease. If you are locked into a long term lease and your business fails, you may face considerable financial and legal penalties if you need to break the lease early. Similarly, a long term lease may not give your business the flexibility it needs if your enterprise is growing quickly. And if you sign a long term lease with unfavourable terms, you are stuck with it.
What are the pros and cons of short-term leases?
Short term leases can span a matter of months up to a period of about three years. There are a number of advantages to locking in a lease for a shorter amount of time, especially if your business is new or growing. A short term lease will give you the flexibility to cater for your business growth, especially if you start with a smaller premises with the intention of moving into a bigger tenancy. A short term lease also lowers the financial risk attached, particularly for early or start-up businesses. If your business is not as successful as you planned or your premises don’t work out as well as you’d hoped, a short term lease gives you the ability to walk away quicker and easier with fewer financial imposts.
There are some disadvantages to signing on for a shorter period of time. Landlords are unlikely to offer generous incentives and sometimes will charge a higher rent for a shorter term lease. In a tight rental market, you may also find that your rental costs increase every renewal. A short term lease also offers less security than a longer term lease as a landlord may choose not to renew your short term lease and instead usher in a new tenant.
How does your business type influence your lease arrangement?
Once you understand the pros and cons of short term versus long term leases, you can assess each option against your unique business needs. The type of business that you have may strongly influence your decision to opt for a short term or long term lease. For those business owners who are just starting out, a short term lease may be the best option to test the waters and see if their business concept can become a success. If your business is well established and you find a premises that’s perfect for your target market, a long term lease may be the better option. Similarly, if you have a large business and you don’t want to risk having to move again in the short term, a longer lease period could be preferable.
What are the financial implications of long and short term leases?
There are a number of different financial implications to consider when you are evaluating a long term versus short term lease arrangement. While a short term lease comes with less risk for businesses that want flexibility to move or grow in the near term, landlords are not typically as generous with concessions. Landlords are often attracted to long term, quality tenants and may be more willing to offer concessions such as assistance with the fit out or discounted rental periods. Over the term of the lease, a tenant may pay more per month with a short term lease than on a longer term agreement.
Why it’s important to consider market conditions and trends
The prevailing real estate market conditions of the day may influence your ability to secure a long or short term lease and the rental pricing. In a tight rental market, landlords may be more likely to want to offer short term leases to give themselves the flexibility to increase rental costs at the time of renewal. Conversely, in a period where there is an oversupply of properties, landlords may want the security of knowing they have a good tenant locked in over the longer term to guarantee their income stream. This may influence their willingness to offer discounted rates or incentives.
Why you should get legal advice before signing a long or short-term lease
As with any contract negotiations, it is advisable for prospective tenants to seek legal advice before signing a rental agreement, no matter how long or short the tenancy term. It is important to understand the clauses of the contract before signing to avoid confusion or unintended consequences in the future. For example, the contract will stipulate the lease renewal dates, which are key to note for short term agreements, and the ability for the landlord to increase rental charges. It will also set out the penalties for breaking a lease early, which is especially important if you are going into a long-term lease agreement.
When it’s time to decide a long term versus short term lease
Finding the right commercial property for your business is just the start of the process towards setting your business up for success in new premises. There are a number of important considerations to factor in before signing on the dotted line of a lease agreement. It is important to consider your unique business needs (flexibility or stability) and business projections (growth or stabilising) before weighing up your leasing options. Don’t forget to make an objective assessment of the property itself to decide if your business would be better suited to trying it out short term or locking in for the long term.
Signing a long term or a short term lease
There are a number of advantages and disadvantages to both long and short term lease agreements. While short term leases come with greater flexibility and less risk if you think you might need to break the lease early, they are also less secure and potentially more expensive over time. A longer term lease will give a tenant greater security and the potential to secure lease incentives, however there is less flexibility if your business grows quickly or changes and needs more space or a new location. You should always consider legal advice and your business’ unique goals before making an informed decision about which lease agreement is right for you.