Commercial Leasing Checklist

August 20, 2020 | Commercial Real Estate

checklist on blue background to represent commercial leasing checklist

Real estate is often one of the biggest 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. In fact, just one paragraph of ambiguous language in a commercial leasing agreement can spark years of stress and may 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 …

Commercial leasing checklist

Lease Term

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 (or changed again), do not commit for more than 1-3 years. But if you want to get a really good deal, think long term.

Option to renew

When the lease expires, what are your options? Will you have an option to renew or extend your lease term?

While we don’t recommend exercising an option in this market, it’s certainly something you want to have up your sleeve. 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. Even if your plans are to relocate after the initial term, 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.

Rent calculation

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 incentives have been factored in.

woman on calculator representing calculating outgoings

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 to entice an existing tenant to renew. There are various types of incentives that commercial tenants can negotiate, so it’s important to understand the option that will work best for your business.

Incentives are especially important to know about in the current climate (i.e. a tenant’s market) because of the opportunity to negotiate more generous incentives. 

For instance, in Sydney, Tenant CS was recently able to negotiate a 25% incentive in St Leonards (up from 12% pre-COVID), 39% incentive in Macquarie Park (up from 22% pre-COVID), a 33% incentive in Surry Hills (up from 18% pre-COVID) and a 32% incentive in the Sydney CBD (up from 20% pre-COVID).

And in Melbourne, we negotiated a 32% incentive in Melbourne CBD (up from 20%), and a 25% incentive on St Kilda Road (up from 12%).

Other Fees

Will any other fees apply to your lease agreement? Always check the fine print of your lease agreement as part of your due diligence. It’s important to be aware of all the costs before you commit.

Outgoings

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. 

We’ve all heard about the significant cost to buildings for a COVID clean after contamination. How will that be recovered?

Who owns the building?

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 it possibly be sold to a foreign investor? Ask them for their tenant retention ratio and before you sign speak to a future neighbour tenant.

Property maintenance

Who is responsible for maintaining the premises (including its fixtures, fittings, and equipment)? Again, is this you or your landlord or is a property manager appointed? And is this another potential negotiation point?

Worker cleaning the side of a commercial building

Lease set-up/legal costs

Who will pay for the lease set-up costs/legal costs? It’s common that landlord’s ask the tenant to pay the landlord’s reasonable legal preparation fees. This is another potential negotiating point and should be capped at a minimum.

Making good

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. These clauses are often overlooked and, if not negotiated well, 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. And, 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:

  • Refreshing the fit-out and selling it to the landlord for $1
  • Negotiating a cash settlement if you can negotiate the right rate

Read more about make goods here.

Market rent reviews

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 that you negotiate to have effective rent reviews as part of the lease agreement instead (i.e. reviews that take incentives into account).

To learn more about the difference between ‘face’ and ‘effective’ market rent reviews here.

Lease exit

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 as a tenant, particularly as the length and effects of the pandemic remain unclear. However, there may be fees involved for exercising any of them, so it’s important to read any associated fine print.

image of date to represent lease exit

Is there a ‘permitted use’ clause?

If there is, it will outline how the premises can 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.

Who owns the building?

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 it possibly be sold to a foreign investor? Ask them for their tenant retention ratio and before you sign speak to a future neighbour tenant.

Other requirements

Are you required to get permits, registrations or other licenses to lease the property? If so, it’s important that you understand these requirements and any associated fees.

The fine print

Do you understand all the terms used in the lease? If you’re in doubt about anything, seek independent legal advice before you sign the lease agreement. Commercial leases are full of jargon and fine print that may trip you up down the road.

Have you negotiated the best deal possible and tenant-friendly lease terms?

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 where there are 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.

Speak to the commercial leasing experts

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 to find out how a tenant advisor can help you save time and money is also quick and free! So, contact the team at Tenant CS today.

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    The Author

    Francois is a highly skilled tenant representation specialist, who brings a wealth of experience across various real estate markets. He manages the tenant representation team in Sydney team.

    Francois has a Masters in the Science of Management from Montpellier Business School (France) and a Bachelor (Hons) in Business Studies from De Montfort University (UK).

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