When it comes to commercial lease negotiation, there are some obvious factors that need to be hammered out, such as rent, lease duration, option to renew, permitted use and whether the space is able to be assigned or subleased.
However, what some tenants don’t know is that nearly all the terms in a commercial lease are negotiable. In fact, in a standard lease, there are over 40 points of negotiation that are often overlooked. And when seemingly small points are glossed over, they can become major problems down the line.
Land tax is a State tax charged annually and fluctuates based on the value of a property. It's calculated on a single-holding basis or a multiple-holding basis (where the landlord owns more than one property).
Land tax is one of the most common costs that landlords seek to pass on to their tenants, and, in theory, they should be charging it on a single ownership basis. But some tenants run into issues where their leasing agreement fails to stipulate how the land tax will be payable (i.e. a single or multiple calculation), or where the contract stipulates single holding but the landlord charges on multiple holding.
So, when entering a lease negotiation, ensure that land tax ONLY applies to the property that you're leasing, rather than a combination of the landlord's properties. The difference in $$$ (i.e. statutory outgoings) can be colossal. And, when paying outgoings, a copy of the land tax invoice must be sighted to verify you're paying the right amount.
Most commercial leases with an option to renew will include a market rent review clause. Here, the landlord will propose a new rental amount in line with what other tenants in the area are paying for comparable spaces.
But a critical and often misunderstood aspect of the rent review clause is whether the new rental is ‘face’ or ‘effective.’
Face rent is a figure that disregards incentives such as rent-free periods, rent reductions (a.k.a rent abatements) and fit-out contributions. In contrast, effective rent is a rental amount that the landlord receives after paying all expenses for operating the property, costs for tenant works and amortising incentives.
At Tenant CS, we strongly advise our clients to negotiate an effective rent review clause (i.e. factoring in all incentives) to ensure that the new rent that the landlord proposes is not subject to false inflation.
You can read more about the difference between face and effective market reviews here.
When it comes to renewals, it's common for market rent to be reviewed six months after you have signed your new lease. In an ideal world, you want to know what the new market rent will be BEFORE you sign your lease.
So, negotiate the right to obtain a market review before the due date to exercise your option. That way, if there's likely be a substantial rental increase, you can decide against exercising your option and go to an open market instead. Alternatively, you could look at negotiating the right to terminate your lease if the review comes in at an unacceptable rate.
Another element of the rent review process that can trip up tenants is when a tenant has to dispute a new rental amount. Here's how it works:
The problem here lies in the timing allowed for the above to take place. A tenant will often find that 14 days is not enough time to do their research and react quickly. And, if you respond too late, the new rent is deemed to be accepted.
Redecoration clauses are common in commercial leases. They require a tenant to carry out maintenance or upgrade works after a set number of years and are distinct from "make good" obligations.
The provision will usually highlight two things:
Failing to comply with the redecoration clause can result in financial penalties or termination of the lease. So, if it’s in the contract, it’s not negotiable.
But what tenants don't always realise is that they can negotiate the type of works required and how often they'll need to be carried out. (It's always better to negotiate terms that you know you can comply with rather than trying to resolve a dispute after signing your lease). It's also essential to get the wording right to avoid landlord-tenant conflict down the track.
Other costs, such as cleaning, also need to be considered in your commercial lease negotiation. These costs are additional to the rent and can be significant, particularly if the wording is ambiguous.
For instance, Tenants often get charged for cleaning charges during the period they are completing fit-out works and cleaning is not possible. However, it is possible to negotiate that the cleaning contract is put on hold while the premises are unoccupied.
As a tenant, it’s essential to clearly understand your responsibilities and be as specific as possible when it comes to the wording around additional costs.
Commercial lease incentives are payments or concessions offered by a landlord to:
The most common types are rent-free periods, rent reductions and fit-out contributions.
But a tenant negotiating their own commercial lease incentive can be akin to asking Dr. Google for a diagnosis. Only those who are watching the markets can confidently tell you what current incentives should be. You need to be monitoring vacancy rates, property yields (cap rates), market rents and fair escalation rates to understand what incentive you can negotiate – and the difference can be in the $100’s of $1,000’s.
In any case, if you are negotiating your incentives yourself, be sure to:
Read more about commercial lease incentives in our Ultimate Guide To Commercial Lease Incentives, For Tenants.
A common area of confusion is whether a tenant is liable for the landlord's legal fees. And the answer to this question is not always black and white; it depends on your lease terms.
A lot of the time, each party will be responsible for their own legal costs. But some landlords will try and get you to pay their legal costs, too. So, it's a good idea to ensure that the wording stipulates that each party pays its own legal fees. Or, at the very least, that the amount payable by you (the tenant) is capped.
Tenants should also avoid (or negotiate out of) any clauses that require them to pay the landlord's legal costs if there is a dispute within their lease term.
Nowadays, many landlords include lease clauses that denote that any associated costs for Green Building Scheme initiatives or improvements are passed onto the tenants. While most tenants will welcome an energy-efficient and environmentally friendly building, these types of clauses open tenants up to unexpected costs.
So, it pays to agree with the landlord in advance regarding:
When entering a commercial lease negotiation, be sure to negotiate clauses that protect you now and in the future. Specifically, think about:
The terms of your commercial lease can act like a slow leak in your tires and can open the door to unexpected costs.
What's more, it's a tenant's market. Covid has turned the world on its head and commercial real estate markets are feeling the impact. With every deal done, a new bar is set. And nowadays, anything is negotiable; the devil is in the detail.
So, critically evaluate your future needs, hit your commercial lease negotiation hard, and consider all opportunities before entering into an agreement.
Better yet, work with a tenant representative who will advocate on your behalf, ensure that your interests are protected, provide you with solid advice and break down confusing language. And, since most landlords cover the rep's fees, hiring one won't increase the cost of your search or negotiation.
Get in touch with the team at Tenant CS today to see how we can save you in your next commercial lease negotiation.