Have a Commercial Lease Expiry? Here’s What To Do Next …

February 1, 2020 | Commercial Real Estate

A commercial lease expiry is one of those things that can creep up on you and can be costly without the right preparation and advice. So if you have an upcoming lease expiry, follow these four tips to help you 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. This is because:

  • Without a lease option in place the landlord does not have to renew a lease – That means that you’ll have to find another space to move into – and fast! This is particularly difficult if a lot of your business goodwill (e.g. customers base, employees, fit out, machinery) is attached to your current premises. Starting the process early means protecting this to some extent because it gives you time to communicate with your customers. You’ll also have more time to find a comparable space, in a suitable location.
  • When it comes to renewals, time is your friend If your commercial 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 enter into negotiations again with the landlord to establish the details of the new lease. And, 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” on a month-by-month basis. But this option can be risky as the notice period is usually only one month (and in some cases, can be as little as seven days!). What’s more, the landlord is not required to provide a reason for termination – so you could be out very quickly!
  • Exercising an option requires notice – If there is an option to renew under your lease agreement it is usually accompanied by a notice period of between 6-to-12 months. The closer you get to your expiry date, the less likely you are to negotiate effectively or find alternative space. What’s more, under most commercial leases, tenants are obliged to provide written notice of their intention to exercise their option.

Depending on the size of your organisation and office requirements, we recommend starting within the following time frames:

Graph showing how many months you should allow to relocate or renegotiate based on the size of your property

2. Be prepared

If you’re looking to renegotiate your existing lease, plan well in advance and gather all the relevant information including your:

  • Lease contract
  • Annexures (if applicable)
  • Recent rent statements
  • Property condition report

3. Analyse your situation – potential relocation?

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 to relocate to a new space in the long run. To make the right decision for your company:

  • Explore the market – Is there a suitable space that 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?
  • Analyse the real cost of relocation – This is arguably the most important tip of all. Sure, the rental rate might be lower in another space, but 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. The grass is always greener on the other side and it is crucial to recognise that sometimes, a higher rent is justifiable because the premises would best serve your business’ current needs and future development.

4. Appoint a tenant advisor

Don’t need the hassle or have the right knowledge or time to spare? Assign a tenant advisor to do all the legwork.

At Tenant CS, we represent tenants and not landlords. And this means that our market information focuses on trends that are important to tenants rather than landlords. For example, we analyse the rents, incentives and vacancy rates between different buildings. We can also grade the quality of individual landlords.

Our years of day-to-day, hands-on experience in strategic negations with landlords and agents will not only speed up the process but will, without doubt, save you money.  

Why Now?

As a new decade begins, there is increased uncertainty across the world, particularly in Australia. There has not been a recession in Australia since 1991, a world record in economic expansion. However, it is increasingly difficult to get a loan due to banks’ increased conservatism and stricter responsible lending laws following the 2019 banking Royal Commission. This has made it increasingly difficult to do business and makes your commercial lease situation even more important.

Slower growth in consumer spending coupled with increased competition have driven up the failure rate of retail businesses:

Don’t want to sacrifice time that could be spent on your business to worry about your lease in today’s uncertain economic climate? Don’t have the time to spare? Or the right knowledge? Assign a tenant advisor to do all the legwork.

Get in touch with one of our team members today to talk about your lease situation!

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The Author

Maxwell brings over ten years of commercial real estate experience and currently works as a tenant representation specialist in the tenant representation Sydney team. He says some of his more memorable projects over the years include an 11,000sqm lease renewal in Islamabad, Pakistan, and the sale of a 200sqm commercial unit on the Canals of Amsterdam.

In his spare time, Maxwell is a loving father, backcountry skiing fanatic, boat lover and food enthusiast.

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