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Pros and cons of short-term leases for SMBs

If you’re looking to trial a new business idea or identify locations for expansion, a short term lease may provide you with an opportunity to test the market without the financial and legal commitment of a longer commercial lease.

Here is a rundown on the pros and cons of short term leases to help you decide if they may be an option for your business.

What is a short term lease?

A short term lease is generally the right to occupy premises for the purpose of conducting a business for a short period of time.

There is no law on how long in time a short term lease must be, however certain short term leases may come under the Commercial Tenancy (Retail Shops) Agreements Act 1985 (the Act).

Why would I enter into a short term lease for my business?

There are many reasons and benefits to entering into a short term lease, including:

  • They are a great way to give your business idea a go without the cost or commitment of leasing business premises for a long period – if things don’t work out, you’re not locked into a long-term lease.
  • It’s a chance to test the market for your products and services; see how well they sell and gather feedback from real customers.
  • You can test a particular location, for example see whether it brings in sufficient foot traffic.
  • If you have an  online business, it gives you the opportunity to trial a bricks-and-mortar store front.

What are the benefits for an existing business?

Short term leases can provide a number of benefits for existing business owners too, including:

  • Providing an opportunity to clear out old stock via one off promotions and special sales. This may be particularly relevant during specific times of the year like Christmas, Valentine’s Day or Easter.
  • Allowing you to trial new products or services before they’re introduced into your existing business.
  • Trialling expansion – if you already have a retail presence and are thinking of opening additional store fronts in new suburbs, a short term lease can help you test how well your products and services sell in different locations.

Any reasons why I shouldn’t enter into a short term lease?

While temporary leasing arrangements can benefit many businesses, there are just as many reasons for not entering into a short term lease, including:

  • In a short term leasing arrangement, you may not have the rights to stay in the premises longer than the lease period (unless the lease includes an option to extend the term of the lease under the Act).
  • If your landlord agrees to extend your lease at the end of your short term lease, you may need to re-negotiate the rent and other lease costs.
  • The time, effort and cost of a short team lease may not be financially viable for your business.
  • It may not be suitable for your product or service.
  • It may be too expensive for your business.

How should I prepare for entering into a short term lease for my business?

  • Ensure the lease and the terms and conditions will meet both your short and long term business needs.
  • Understand that the landlord is not obliged to extend your fixed short term lease and can refuse to extend it (unless the Act applies).
  • Don’t spend money on a fit out or specific items. Instead, look for premises already fitted out for a short term tenancy. If the intent is to introduce a product or service to market, be prepared that the exercise might not be profitable.
  • Educate yourself on leasing business premises and short term leases. At the end of the day you are the one making the final decision.
  • Research all the available suitable premises and the terms and conditions on offer.
  • Negotiate with the landlord to reach an agreement that works for you and your business. Be prepared to walk away if what is offered does not work for you.

What should I do before agreeing to a pop-up shop short term lease?

We recommend not entering into any lease, short term or otherwise, unless you get full legal, financial and business advice including advice on your rights and the options under the Act.

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