A commercial lease expiry can creep up on you and be costly without the proper preparation and advice. So if you have an upcoming lease expiry, follow these four tips to get the best results.
1. Start early
This is the most valuable piece of advice we can give our clients.
Timing is an essential part of any renegotiation or relocation project because:
It gives you leverage - Impending deadlines can be used against unprepared tenants because of the urgency they create. Landlords also tend to become more flexible as negotiations progress. So, entering negotiations with plenty of time up your sleeve gives you the leverage you need to negotiate a better deal and means you're not entering negotiations with your back against the wall.
It allows breathing space - Timing is also crucial to give you the breathing space you need to conduct your workplace strategy and understand your property requirements before sourcing relocation options or renegotiating with your landlord. It also gives you the ability to engage in a stay v.s. go process to make well informed decisions and create a level of ‘market tension’.
Without a lease option in place, the landlord does not have to renew - Which means you'll have to find another space to move into - and fast! This becomes really difficult if a lot of your business goodwill (e.g. customer base, employees, fit-out, machinery) is attached to your current premises. Starting the process early on helps protect this goodwill because you'll have time to communicate with your customers and find a comparable space in a suitable location.
When it comes to renewals, time is your friend - If your leasing agreement does not contain an option, it means you have no automatic right to renew your lease. Assuming both parties are happy to renew, you'll need to negotiate to establish the new lease terms. So, if the landlord knows you're running out of time, they'll have the upper hand at the negotiating table.
A holdover is an uncertain fate - If a fixed-term lease expires, the landlord may agree to let you stay in the premises on "holdover" or "over holding" month-by-month. But this option can be risky as the notice period is usually only one month (in some cases, it can be as little as seven days!). Moreover, the landlord is not required to provide a reason for termination - so you could be out very quickly if they secure a tenant.
Exercising an option requires notice - If there is an option to renew under your lease agreement, it usually requires a notice period of between 6-to-12 months. Most commercial tenants will also be obliged to provide written notice of their intention to exercise their option. The closer you get to your expiry date, the less likely you will negotiate effectively or find alternative space.
In a tight market, more time gives you more options - Though the balance has shifted in favour of the commercial tenant, industrial tenants face tightening market conditions. So, if you're an industrial tenant and do not leave yourself enough time, you may be left with no market options and no leverage to negotiate optimal renewal terms.
Calculating the amount of time needed to secure a great space and deal is not an exact science. It comes down to the market, the size of your business, your internal objectives and projected future growth. We recommend starting within the following time frames:
At Tenant CS, we advise our clients to prepare as early as possible. As a rule of thumb, leave at least one year to explore the market and decide whether it's best to stay put or relocate. However, larger occupiers, particularly industrial tenants and mid-to-large global companies with lengthy approval processes, are encouraged to start at least two years before lease expiry.
Is having time up your sleeve still valuable in a tenant’s market?
Pre–COVID, agents and landlords were constantly pressuring commercial tenants to make quick decisions. But in the current market, commercial tenants are in the driving seat, and plenty of great options are available. So, if you don't get the terms you are looking for, don't be afraid to say no and walk away. If you've left yourself enough time, there's sure to be another suitable option out there. Commercial landlords will also go to lengths to retain high-quality sitting tenants. So, they may come around to your terms.
Unfortunately, the same cannot be said for industrial tenants. Across Australia, the industrial vacancy rate has hit record lows. However, even in a tight market, industrial tenants still have options. And having time up your sleeve is the key to securing a good deal because it:
Gives you breathing space to understand your requirements and negotiate effectively
Gives you room to consider upcoming lease expiries, greenfield sites and built-to-suit options
Allows you to make a plan of attack and implement strategic decisions that create opportunity
2. Be prepared
If you're looking to renegotiate your existing lease, plan well in advance and gather all the relevant information, including your:
Annexures (if applicable)
Recent rent statements
Property condition report
3. Analyse your situation and remain opportunistic
Should you stay or should you go?
The answer is not black and white.
Think carefully about whether it would be better to renegotiate your lease or relocate to a new space. These days, unless you already have a tenant-friendly lease, we often advise our commercial clients not to exercise their options and instead go to an open market.
In any case, to aid your decision, be sure to:
Explore the market - Is there a suitable space you can move into? How would the new lease compare to your existing lease? Remember, no building is the same. Rent, vacancy rates and incentives will vary, depending on the building, location and the landlord. So, do your research.
Consider your business plans - How will these impact your current and future space requirements? Will your existing space be able to accommodate planned business changes, or does it make more sense to move now?
Analyse the real cost of relocation - This is arguably the most important tip of all. The rental rate might be lower in another space, but the grass isn't always greener on the other side. Think about the additional costs that come with relocation. For instance, IT/fit-out costs, 'make good' costs, moving costs and the potential impact the move might have on staff and customers. It's crucial to recognise that a higher rent is sometimes justifiable if the premises adequately serves your business' current and future needs.
Stay opportunity-driven - If you're an industrial tenant battling a tight market, comb through all market options, even if these options do not align with your lease expiry. Then, make strategic decisions that create future opportunities, like renewing at your current premises and negotiating the ability to assign or sublease your space. This way, you can keep searching for your dream premises without the pressure of lease expiry.
4. Appoint a tenant advisor
Don’t need the hassle, have the right knowledge or time to spare? Assign a commercial tenant advisor to do the legwork.
At Tenant CS, we represent commercial tenants and not landlords. And this means that the market information we rely on in negotiations focuses on what's important to tenants. For example, we analyse the rents, incentives and vacancy rates between different buildings and assess the quality of individual landlords.
Our years of hands-on experience in strategic negations with landlords and agents will speed up the process and save you money. In our experience, tenants who negotiate their lease pay an average of 22% higher rent over the term of the lease. So, it pays to partner with a professional.
If you’re a commercial tenant, these are unprecedented times and anything is negotiable. And if you’re an industrial tenant facing a tight market, creating competition for your tenancy becomes the great equaliser in negotiations. And, tenant reps help create this competition simply by showing up.