Common Commercial Real Estate Terminology: A Handy Guide For Tenants
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.
An accounting period is the 12 month period ending June 30 (or another period of 12 months 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.
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 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.
Car Parking (+Levy)
Car parking costs are usually charged separately to the rent, and in some cases, a state government levy may apply.
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 of Statistics (ABS) publishes CPI figures.
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.
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.
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 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 eight great space-saving tips for your office.
Landlord works are any works carried on on the premises by the landlord in regards to the tenancy or building (example lobby refurbishment).
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 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)
Subject to negotiation, tenants usually need to restore the premises to its original condition when the lease ends.
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.
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:
- The expenses that you will be responsible for paying
- The base date that will be used for calculating your outgoings.
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 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):
- Fixed rent review
- CPI increase
- 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 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.
Start of the lease
This is the first day of your lease term. But, if the agreement you’re signing is a renewal – that is, you’ve exercised your option – the starting date is the
Rent will include a Goods & Services Tax (GST) of 10%. This is a tax from the Government, not the landlord.
The tenant’s employees, agents, contractors, customers and visitors to the premises.
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 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).
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.