Common Commercial Real Estate Terminology: A Handy Guide For Tenants

October 3, 2022
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Commercial Real Estate

Commercial real estate terminology in Australia can often be confusing, especially if you haven’t been a commercial tenant before. It’s important you understand the real estate terms you’re confronted with, so here’s a handy guide to help you out.

Accounting period

An accounting period is the 12 month period ending June 30 (or another period of 12months specified by the landlord) with respect to the lease for recovery of outgoings.It includes any broken periods at the start and end of the lease term.

Assignment

An assignment is where the entirety of the lease is transferred to a new company.

Base Date

Landlords typically have a base date/year in the lease used to calculate increases in their outgoing recoveries from tenants.Generally, all future and past costs are indexed or compared to this year or date.Problems can arise for tenants when the base date does not coincide with the commencement of the lease agreement. Learn more about the base date here.

Blend and extend

An industry phrase that means “extending”an existing lease term and “blending” the rental rate that they are paying with a newly negotiated rate and/or terms. Learn more about a blend and extend here.

Building Amenities

A building’s amenities are features or facilities that provide added comfort, value or convenience to sitting tenants.Some examples of building amenities include end-of-trip facilities, undercover parking, building signage, gyms or on-site training facilities or the natural environments, like green terraces.

Building outgoings

Building outgoings are expenses like rates, levies, taxes, maintenance and repairs that come as a result of owning a building or premisies. These expenses are usually passed on from the landlord to the tenant/s.

Cap rate

The capitalisation rate (or cap rate) is calculated by dividing a property’s net operating income by the current market value. This ratio, expressed as a percentage, is an estimation of an investor’s potential return on a real estate investment.

Car Parking (+Levy)

Car parking costs are usually charged separately to the rent, and in some cases, a state government levy may apply.

Common areas

Areas on the premises that are under the control of the landlord and are intended for use by the public or tenants.

Consumer price index (CPI)

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by households for goods and services. In Australia, the Australian Bureau ofStatistics (ABS) publishes CPI figures.

Effective rent

Rent that accounts for any incentives provided to you as the tenant. Under an effective market rent review, your rent would be lower than it would be under a ‘face’ market review. Learn more here.

Face rent

Face rent is a rent figure that disregards incentives such as rent-free periods, rent reductions (a.k.a rent abatements) and fit-out contributions. You can read more about commercial lease incentives and what to look out for here.

Fixed rent review

A fixed increase in rent that happens on specified dates during the lease term.

Force Majeure

Also known as an ‘Act of God’ provision, a “force majeure” is a clause in a commercial lease that releases a party from its obligations if affected by an event outside of their control, such as a natural disaster. Post-COVID, some commercial tenants are working with their representatives to try to get the words “epidemic,” “pandemic” or “disease” included within this clause to ensure they’re covered in the future.

Fit-Out

Fit-out refers to alterations made to a premises, usually at the tenant’s expense. The extent of your fit-out requirements will depend on the state of the property (i.e. refurbished, warm shell, fitted-out) and your brand.

Already fitted-out your premises but short on space? Follow these great space-saving tips for your office.

Heads of agreement

An initial, non-binding document that establishes the basic framework for a formal lease. The agreement is the first step toward creating contract, and can be renegotiated or reneged.

women working through contract full of commercial real estate terms

Incentive

Commercial lease incentives are payments or concessions offered by a landlord to:

  • encourage a new tenant to sign a lease
  • to entice an existing tenant to renew.

Incentives can come in many forms and vary across Australia, depending on market conditions. The most common types are rent-free periods, rent abatements and fit-out contributions.

Landlord works

Landlord works are any works carried on on the premises by the landlord in regards to the tenancy or building (example lobby refurbishment).

Lease Term

The lease term is the amount of time the lease is in effect. For offices, 3-5 years is standard. However, the term can be longer or shorter depending on your negotiations with the landlord.

Legal Costs

Legal expenses arise from any negotiations or paperwork that you require a lawyer to undertake on your behalf.

When it comes to commercial leases, both parties will pay their own legal costs unless otherwise specified in your lease.

Make Good (Restoration)

A make good provision is a clause in a lease that requires a tenant to return a property to its original condition before handing back the keys.

Make good clauses require tenants to remove their property from the space and leave the area clean and tidy. Further obligations may include:

  • Repairing any damage caused while you occupied the property
  • Removing (or reinstating) all partitions, fixtures, joinery, installations, flooring and ceiling finishes
  • Removing installed walls, floor finishes and the ceiling and returning all base building air conditioning, fire and hydraulic services to an open floor plan.

Here’s a great article regarding how to make good at the end of a commercial lease and avoid landlord disputes.

Market Rent Review

Market rent reviews are often preferred by landlords where there is an option to renew the lease. They allow the landlord to re-assess the rental rate for the premises so that it falls in line with the current market rental rates. That is, it’s consistent with what other comparable properties in the area are earning.

Net Lettable Area

The net lettable area is the property’s internal floor area, according to the industry standard set by the Property Council of Australia. It doesn’t include toilets, service ducts, stairways or elevators.

Net and Gross Rent

  • The net rent is just the base amount of rent payable. Tenants may be required to pay additional expenses called outgoings (see definition of outgoings further down)
  • The gross rent is usually a higher amount as it includes the net rent and the outgoings

Take a look at this article to learn about how much rent you should be paying for your office space.

Option to Renew

An option to renew is a clause in a commercial lease agreement that allows a tenant to renew their lease at the end of the lease term. It could be anywhere from one year up to the original lease term. As a tenant, you are not forced to exercise your option.

Option to Terminate

An option to terminate is not common in lease agreements but it can be added in your contract upfront while negotiating lease terms with the landlord. The termination clause will outline the reasons a lease could be terminated before the end of the lease term and the conditions to do so.

Learn about more ways to break a commercial lease here.

Outgoings

Outgoings are a tenant’s proportional share of expenses such as property tax, water rates, strata levies, insurance, real estate taxes, security to name a few.

As a tenant, when it comes to outgoings, there are two important things to consider:

  1. The expenses that you will be responsible for paying
  2. The base date that will be used for calculating your outgoings.

Permitted Use

The permitted use clause in a lease tells you how you are allowed to use the premises. This will usually be broken down in a lease schedule, letter of offer or heads of agreement.

Rent Review

Rent reviews usually occur annually in line with the market, however, it will only ever be an increase. Your lease may specify that the rent is reviewed in one of three ways (we’ve defined all three in this article):

  1. Fixed rent review
  2. CPI increase
  3. Market rent review (if there is an option to renew)

Rent reviews often trip up tenants because the process and terminology is vague. And this is especially true when it comes to differentiating between ‘face’ and ‘effective’ rent reviews. Commercial tenants, especially those new to leasing, often do not understand the difference between these two terms; but it’s vital to understand.

You can learn about the difference between ‘face’ and ‘net’ rent reviews here.

Security Deposit/Bank Guarantee

Tenants will be required to pay a security deposit (similar to a bond on residential properties) or a bank guarantee, which usually amounts to 3-12 month’s rent.

Stamp Duty

Stamp duty is a duty or tax imposed by the State Government on particular transactions.

When it comes to commercial leasing, you will be required to pay stamp duty if you make a lump sum payment to your landlord to secure your lease. You will also be required to pay stamp duty on the assignment or transfer of a lease.

Stamp duty rules may vary state-to-state. Here’s a bit more information about when you’ll be required to pay stamp duty on a commercial lease in NSW.

In commercial leases, both parties will pay their own stamp duty.

Subleasing

An agreement whereby a tenant who already holds a lease to a commercial property(sublessor) rents out all or part of their premises to a secondary tenant (sublessee). Learn more about the pros and cons of subleasing here.

Surrender

A surrender of lease is where the tenant gives up their interest in the property to the landlord.

Taxes

Rent will include a Goods & Services Tax (GST) of 10%. This is a tax from the Government, not the landlord.

Tenant’s Agents

The tenant’s employees, agents, contractors, customers and visitors to the premises.

Tenant Works

Tenant works are any works carried on on the premises by the tenant. For example, the installation of a new fit-out. In most cases, the lease will require a tenant to seek the landlord's written consent.

Utilities

Utilities refer to water and electricity costs. Electricity is usually billed directly by the energy provider, but water may be included in the outgoings (see above).

WALE

The Property Council of Australia define a WALE as ‘the weighted average lease term remaining to expire across a portfolio, it can be weighted by rental income or square metres.’

Workplace Strategy

Workplace strategy aligns the physical environment and infrastructure of a workplace with a company’s goals, culture, and ideal way of working.

Get the help of a tenant representative

If you do not have the time or expertise to navigate the complexities of commercial leasing, then hiring a tenant advisor is a smart move.

A tenant advisor acts exclusively for tenants with no conflicts of interest. They give tenants the upper hand in lease negotiations and assist with communication with landlords and agents.

The team at Tenant CS bring years of experience in the Australian market. Get in touch with one of our team members to see how we can help you!

Enjoyed this article about common commercial real estate terms used in Australia but want more information? Here are seven reasons to appoint a tenant representation specialist. You can also consult this handy checklist to ensure you’ve dotted your I’s and crossed your T’s before entering a commercial lease agreement.

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