Real estate is often one of the most significant expenses for a commercial business. So, you can't be too careful when signing your commercial leasing agreement, especially in today's climate.
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. 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 dotted your I's and crossed your T's 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. COVID has taught us about the benefits of 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. But if you want to get a terrific deal, 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, at Tenant CS, we believe that having an 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.
How will your rent be calculated? Is it net, gross or effective?
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 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.
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, be sure to 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 be sure that 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 landlords' responsibility or yours as a tenant? Outgoings can really affect a tenant's bottom line and should be a negotiating point.
Who is responsible for maintaining the premises (including its fixtures, fittings, and equipment)? Is this your responsibility, your landlords, 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.
It's also important to note that it's currently a tenant's market and will be for the foreseeable future. As a result, spec fit-outs are becoming more popular. In a volatile market, commercial tenants can leverage this trend at the end of their lease by:
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, at Tenant CS, we recommend 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.
These clauses can provide you with greater flexibility as a tenant. However, there may be fees involved for exercising any of them. 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.
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 them for their tenant retention ratio and, before you sign, speak to a future neighbour tenant.
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 are different from "make good" obligations. And, once they're in place, the 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? 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 may 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. It's wise to engage a professional, like a commercial tenant advisor, who fully understands local market conditions and the intricacies of commercial lease agreements 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, contact the team at Tenant CS today.