Checklist: Commercial Leasing Agreements

January 21, 2019 | Commercial Real Estate

Commercial leasing checklist and pen

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.

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. Ideally, your premises and the length/ flexibility of your lease will be able to cater to business growth or changing needs.

Option to renew

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. In fact, we believe that having an option to extend the lease is the only safe way to go. Even if your plans are to relocate after the initial term for one simple reason; it gives you leverage as a tenant when you are looking for alternative premises in the future.

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.

Calculator and pen lying on commercial leasing checklist

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.

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 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 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, of not negotiated well can lead to tenant-landlord conflicts later down the track.

Rent reviews

When and how can the rent be reviewed and changed?

Landlords typically lock in market rent reviews to help safeguard their investment against lagging rents. The market rent review is an entire topic by itself. To read more about this click here.

If your lease includes an option, will the rent review be a face or effective rent review?

Landlords will often 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).

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. However, there may be fees involved for exercising any of them, so it’s important to read any associated fine print.

Calendar on an office worker desk

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.

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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