Opening your own salon for the first time and don’t know anything about commercial leases? This guide will shed some light on how to go about it.
Commercial leases are different to residential leases. The terms and costs are not the same and there is a lot of red tape. Taking on a shop lease can be a bit of a process which takes time and money.
Please note, the advice in this article is general in nature and not meant to replace professional advice. There may be differences in your particular circumstances or changes in the future with commercial leases in Australia that this article does not cover.
Lease Terms
Commercial lease agreements go for much longer than residential leases. Often they are 3 to 5 years long with an option to extend an additional 3 to 5 years. If this is not suitable for you, you can try to negotiate this, for instance, to do 2 years with an option for say another 2. The real estate agent will pass on any of your negotiations to the landlord. Better to ask and be politely refused than not ask at all.
The benefit for you to having a longer lease is security for your business. If you have invested a considerable amount on a shop fit out (more on that later), you will need to be in that location long enough to see a return on investment.
Rent free period? Yes please!
It is common practice to get a rent-free term at the start of your lease. This is so you have time to get your shop fit out done before you can actually start trading. If they don’t offer a rent-free term, ask for it. They will expect you to ask, so don’t be shy about this. Usually, it’s 1 month for very year in the agreement. So, if the agreement is for 3 by 3 years, you would get 3 months rent free at the commencement of your lease. You would not get another 3 month rent free at the start of your second term however.
Hidden costs of commercial leases
Often you are charged for outgoings like water usage. If you are part of a shopping complex this might be divided evenly amongst all the businesses, regardless of your own usage. When enquiring about a commercial property, ask what the outgoings are so you can understand the true costs of the property.
Waste disposal is another cost you need to factor into your expenses. If you are a street front you will need to set up your own waste disposal, either through your council or a private company. They will supply you bins to use. You may need to padlock these so they don’t get filled by anyone else, increasing your waste cost.
Some shopping complexes have waste included in your lease however check to be certain.
Rental Increases
Rental increases are written into commercial agreements and are annual. So, if your rent is $5000 at the start of your lease, at a 4% annual increase it would be $6083 in year 6, and would continue to increase each year.
That is an extra $1083 a month you need to cover your operating expenses. Don’t fall into the trap that increasing your sales by $1083 a month will cover this, because once your operating expenses are factored in, you may in fact need $5000 more a month in sales to cover this.
Legal Stuff
Once you have found a commercial space you want you will need to engage a conveyancer or property lawyer to review the lease agreement and advise you before signing. It’s not allowed in Australia to proceed without using one. This may cost a couple of thousand dollars and you can shop around.
Get everything in writing with all stakeholders to protect yourself. Keep all correspondence including emails. Real estate agents represent the interests of the landlord.
Shop Fit Out
Shop fit outs can cost a considerable up-front amount. It’s not unusual to spend $200,000 or higher. Some of the larger shopping centres require plans drawn by an interior architect and this cost needs to factored in too. Definitely shop around and ask the shopfitters you are making enquiries with what their requirements are.
Fit outs are such a huge expense, and it may be best to find ways to reduce the cost. Otherwise it could take you much, much longer to see a return on investment. If you are doing lash and brow treatments, do you need seperate rooms or would an open plan or room dividers work just as well? Can you do the painting yourself? Do you need shelving and storage installed or can you use free standing? Can you use ring lights instead of reconfiguring the ceiling lighting?
Plumbing, cabinetry, air conditioning installation and electrical would need to be done by professionals.
Warning!
Many factories close over the Christmas period in Australia from around November and do not reopen till February. This means your shopfitters may not be able to get anything made for your shop fit out in this period. Keep this is mind when planning.
Council
Your council will require you to submit a Development Application (DA) for your salon. They will charge you a percentage of your shop fit out and fees. It can also can take a few weeks while you wait for a reply. Each council has it’s own rules so contact your council and find out what their requirements are for beauty salons and what their turnaround times are.
Most councils at the very least require hot and cold running water with two sinks; one for cleaning equipment and one for washing hands and a hard floor which can be cleaned properly.
If your shop has been a hair or beauty salon before, you will not need a DA and can instead apply for a Compliance Development Certificate (CDC). This will save you a bit of money.
Exiting a lease
If you need to exit your lease you will usually need to strip out the shop and repaint it white. Check your agreement exactly what condition you need to return it to and how much notice the real estate agent needs, even if you plan to exit at the end of your agreement term. They usually will not let you exit early without penalty so ask what this would be if this is the situation you are in.
So these are the ins and outs of taking on a commercial lease. Commercial leases are longer than residential leases and there are extra costs with outgoings, legal requirements, and annual rent increases. There is also council requirements and the shop fit out to take in account. Plan ahead the costs and timelines. This will help you see where you can make adjustments and potentially save or circumnavigate delays.
Keep all correspondence to protect yourself and reduce costs where you can so you can see a profit sooner.