For a small business, the two biggest liabilities and commitment that a business can commit to are employees and lease agreements.

The reason why a lease is an inherent liability for a small business is because this will generally be the costliest expense that a small business will incur as a result of running/conducting their business. Furthermore, by entering into a lease, the business will be essentially ‘locked in’ to the lease for a set period of time and will have to continue paying lease payments for the duration of the agreed period of time.

What is a lease?

A lease is an agreement which a lessor and lessee enter into, where the lessor is the landlord who owns the land, and the lessee is the tenant.

The consideration for the parties is as follows:

1.      The lessor will receive lease payments as a result of the lessee occupying the premise; and

2.      The lessee will receive, for a period of time, exclusive possession to the premise, subject to their compliance to the lease agreement.

Indemnity clause

Whether you are a small business or a landlord, the indemnity clause is a standard clause that appears on every lease agreement. What an indemnity clause generally looks like is as follows:

“The lessee indemnifies the lessor for any costs and expenses that the lessor incurs in relation to the lease.”

What the above clause does and means is that it will hold the lessee responsible any and all expenses that the lessor incurs arising from the lease. For example, any costs incurred as a result of legal proceedings etc.

For the lessor, this is a crucial clause which is put into the agreement to protect the lessor for any unexpected costs that arise as a result of the agreement. However, for the lessee, this clause is detrimental to a lessee in the event that any issues or disputes arise.

In a recent case of Alamdo Holdings Pty Ltd v Croc’s Franchising Pty Ltd [2023] NSWSC 1746, the plaintiff and the defendant being Alamdo Holdings Pty Ltd (lessor) and Croc’s Franchising Pty Ltd (lessee) respectively, the defendant/lessee was ordered by the Court to pay for the legal fees in relation to the legal proceedings. The matter was in relation to overdue lease payments by the lessee to the lessor during the Covid-19 period. As a result of the inclusion of the indemnity, the lessee indemnified all the costs associated with the lease being commencing legal proceedings.

If you are a business owner looking to enter into a lease agreement, please do not hesitate to contact us.

*Disclaimer: This is intended as general information only and not to be construed as legal advice. The above information is subject to changes over time. You should always seek professional advice before taking any course of action.*