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Risks to consider with a commercial property lease

Updated: Jul 8, 2023

Considering office leases are usually a three-plus year commitment, where do you see your business by then? Here are some key points to consider before signing an office lease.

First step is to assess your space requirements based on your staff numbers. The old rule of thumb is 10 sqm per staff member, which allows for spaces you don't use very much: things like a boardroom, a staff lunch room, reception area, bathrooms and connecting spaces like hallways.

Next, forecast growth & acquisitions to predict future staff numbers. Allow at least 20% for growth. If your space needs to expand faster, that's good news surely? Maybe not if you need to move out and then sub-lease your space, manage a tenant and make a loss in doing so.

Then revisit this forecast, considering your space needs if the current downturn is longer and tougher than expected. Or if the staff you need to retain now, or want to hire in the future would prefer to work remotely. What if you will need only half your space in two years time?

A typical office boardroom is under-utilised
Critical office space or future junk room?

Sub-letting part of your space can be disruptive, and you will ultimately be liable for any damage caused by your sub-tenants.

Scenario planning like this will only take you so far. Ultimately you need to sign for a fixed amount of space under a commercial lease. But also you need to sign for a fixed amount of time.

So think about lease term. Shorter leases are good, right? Maybe, but what if a major tenant wants your short-term rental space? Are you ready to move again in just one or two years?

Lastly, consider the worst case for business owners. What if your venture is unsuccessful? It's not a crime to fail, right? We agree - it shouldn't be, but the consequences of a business folding can feel like a life sentence. Not only have you lost your company, but your income source too.

Wait, it gets worse. If you provide a personal guarantee, as most commercial leases require, you will have a large personal liability you maybe can't cover. Personal bankruptcy can soon follow.

Remember too, a limited liability company won't protect your family home or other personal assets when a personal guarantee is signed in a lease document. And recent changes to trust laws in New Zealand can also provide options for creditors to pursue otherwise protected assets.

If you think this is all far fetched, read about Lester Bryant's personal experience in this Stuff article. Or read Lester's informative book "Going Broke" in which he details how quickly, and how badly, things can go wrong when locked into fixed-cost commitments like commercial leases.

Even a simple photocopier lease can tip you into bankruptcy if your cashflow becomes negative. Leases are fixed costs you cannot turn off or even scale down as the business tightens.

Business owner warns of the risks involved in office leasing for small business
Lester Bryant warns about the real consequences of leases and personal guarantees for small business owners

But setting up in business doesn't need to be scary. There is a modern alternative for business owners needing a more flexible work environment, one that minimises uncertainties and risks.

It's called a shared or coworking space, ideal for start-ups, consultancies and small business.

Take only the space you need and then expand or contract as your business dictates.

No leases, no long-term contracts, no guarantees

Only short-term agreements, variable costs and inclusive pricing *

Not all shared spaces have inclusive pricing - it pays to check *

Which you can do by clicking here: List of coworking spaces in the Hawke's Bay

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