Real estate is one of the most significant expenses for a commercial business. So, you can't be too careful when signing your commercial leasing agreement.
Making the wrong decision could hurt your company in the long run if your commercial lease terms are not flexible or you do not get what you need. In fact, even one paragraph of ambiguous language in a commercial leasing agreement can spark years of stress and even lead to litigation.
So, if you're ready to sign a commercial real estate contract, ensure you've done your due diligence by reading through our commercial leasing checklist first…
What is the duration of the lease? What is the ideal lease term for your line of business?
Consider the short, medium and long-term needs of your business. If the last few years have taught us anything, it’s that there’s real value in having short, flexible lease terms. So, if your needs have changed or are likely to change, do not commit for more than 1-3 years - consider a short-term lease with renewal or expansion rights instead. However, if you want to get a terrific deal and your business trajectory is clear, think long-term.
When the lease expires, what are your options? Will you have an option to renew or extend your lease term?
An option to renew or extend can be crucial in markets with low vacancy rates, and where the location of your current premises is important to your business success. And, while we don't always recommend exercising an option in this market, it's certainly something you want to have up your sleeve.
Even if you plan to relocate after the initial term, we advise our clients that having the option to extend the lease is the only safe way to go. That's because it gives you leverage when you are looking for alternative premises in the future. It also stops your landlord from finding a replacement tenant until you decide whether you want to stay or relocate.
Note that net rent excludes building costs, and effective rent is the amount payable after factoring in incentives.
Are you entitled to an incentive? If so, how much and what type (rent-free period, rent abatement or fit-out contribution)?
Commercial lease incentives are concessions or payments offered by a landlord to encourage a new tenant to sign a lease or entice an existing tenant to renew. Commercial tenants can negotiate various types of incentives, so it's essential to understand the option that will work best for your business.
Carefully evaluate any plans for your future business expansion in order to avoid paying for additional space that you might never actually occupy.
If you’re unsure about long-term needs, consider locking in a property that suits your immediate requirements and negotiating a clause that will give you the right to expand your office footprint down the track.
Will any other fees apply to your lease agreement? Always check the fine print of your lease agreement as part of your due diligence.
For instance, tenants often get charged for cleaning during fit-out works where cleaning is not possible. So, negotiate that the cleaning contract is put on hold while the space is unoccupied. Be aware of all the costs before you commit - understand your responsibilities and ensure any wording around additional charges is crystal clear.
What does your commercial lease include? Who will be responsible for paying for taxes, insurance and other outgoings, such as council and water rates? Is this your landlord's responsibility or yours as a tenant?
Commercial outgoings are the expenses associated with operating and maintaining a commercial property. They can affect a tenant's bottom line and should be a negotiating point. So, be sure to ask your landlord for a complete breakdown of outgoings during negotiations. This way, you'll be across the outgoings that you'll be responsible for and can attempt to negotiate out of any that do not align with your business requirements.
Be aware that outgoings exclude utilities and tenant-specific costs that are directly linked to a tenant's consumption or use of the space, such as electricity, water and internet.
Before signing a lease, undertake a thorough background check on both the landlord and the property management team by reading online reviews and news articles and potentially speaking to other companies about their experiences. You should also reach out to local agencies to verify the landlord's ownership of the space.
Who is responsible for maintaining the premises (including its fixtures, fittings, and equipment)? Is this your responsibility, your landlord's, or is a property manager appointed? And is this another potential negotiation point?
Who will pay for the lease set-up costs/legal costs? Be careful of clauses that stipulate that you, the tenant, must pay the landlord's legal costs.
It's common for landlords to ask the tenant to pay for their reasonable legal preparation fees. So, ensure that the wording stipulates that each party is to take care of its own legal fees or, at the very least, that the amount payable is capped.
Do you have a make-good clause in your agreement? If so, what do the terms stipulate?
A 'make good' clause is a commercial lease provision that stipulates that a tenant must return a commercial property to its original condition at the end of the lease.
Often overlooked and poorly negotiated, these clauses can lead to tenant-landlord conflicts later down the track.
When and how can the rent be reviewed and changed?
Landlords used to insist upon market rent reviews to help safeguard their investment against lagging rents. But now, in a falling market, a rent review will only benefit the tenant (as long as there's no Ratchet Clause).
Landlords will typically favour 'face' rent reviews that disregard incentives. However, we recommend that you negotiate to have effective rent reviews as part of the lease agreement instead (you can learn more about that here).
Another thing to consider is how long you have to dispute a new rental amount. Lessees are usually given around 14 days to agree with or refute the new rental amount. The problem here is that 14 days is often not enough time to do your due diligence. And, if you respond too late, the new rent is deemed to be accepted. So, be sure to negotiate this point.
Does the commercial leasing agreement allow for early termination, right of assignment or the right to sublet clause?
These clauses can provide you with greater flexibility if your need to vacate a space early because you no longer need it or because you outgrow it. However, there may be fees involved in exercising these types of clauses. So, it's essential to read any associated fine print.
How can the premises be used? It's in your best interests for this clause to be as broad as possible. That will give you maximum flexibility if your business circumstances change over time.
While you’re at it, be sure to check local zoning laws to ensure your business will be compliant with them.
If the owner isn't local, it could be tough (and frustrating) to get in contact with them for repairs and maintenance requests. And if they are local, what are their future plans? Will their investment possibly be sold to a foreign investor?
Ask your landlord for their tenant retention ratio and, before you sign, speak to a future neighbour to get a feel for the property and an idea of the landlord's reputation.
Redecoration clauses require a tenant to carry out maintenance or upgrade works after a set number of years. They're fairly common in commercial leases and are different from "make good" obligations.
Once they're in place, redecoration terms are non-negotiable. So, be sure to negotiate terms that you know you'll be able to comply with before you sign your lease.
Are you required to get permits, registrations or other licenses to lease the property or undertake tenant improvements? If so, you must understand these requirements and any associated fees.
Do you comprehend all the terms used in the lease? Commercial leases are full of jargon and fine print that can trip you up down the road.
If you're in doubt about anything, seek independent legal advice before signing the lease agreement.
This is crucial.
The commercial leasing market is highly competitive, and landlords are always eager to secure high-quality tenants. Your potential negotiating power increases further in markets with high vacancy levels (like the one we are in now).
It's best to engage a professional, like a commercial tenant advisor (who fully understands local market conditions and the intricacies of commercial leasing) to negotiate on your behalf.
At Tenant CS, we represent tenants, not landlords. With our help, you'll sleep well knowing that you've explored all of the market alternatives, negotiated the best commercial lease terms possible and pursued the right option for your business.
This commercial leasing checklist is a great start, but an initial conversation about how a tenant advisor can help you save time and money is quick and free!
So, book a discovery call with our team today.