Negotiating the Lease – by Giles Knapman MRICS

With the business premises lease typically being the largest fixed cost, the utmost care is required. This is required to make sure not only are the headline numbers reasonable, but also so that other lease terms are fair and allow for a number of ‘if’scenarios.

There are a host of factors to consider if there is a forthcoming lease expiry; a small number are captured below:

• When should it be addressed? This depends on the size of the premises and what geographical market the tenant is in. An office of say 1,000sqm should have action taken, whether the intent is to stay or go, no later than 9 months before the expiry date, if there are existing premises. A premies of 5,000sqm needs consideration at least 18 months before expiry. Action too late is clearly undesirable but approaching the market too early can also be at a cost to the commercial tenant.
• If staying put is viable, is there an option in the lease? If there is, note the timing constraints and most importantly the rent review mechanism. All too often we see options exercised by tenants who then end up paying an artificially high rent (by upto 40%+) for the new option term. This can cripple some businesses. Exercising the option can be precisely the wrong thing to do.
• How do you know what you are being offered by the existing building manager or landlord agent  is fair? Essentially, you don’t. Comparisons can of course be made with other options on real estate websites but any terms agreed should ideally contain at least 35 clauses, which means that there are 34 others which deal with issues other than rent. A Heads of Ageement light on detail will come back to bite a tenant come the time for lease negotiations.
• Don’t just focus on the rent. There are some clauses which can have a far greater impact than saving $10/sqm on the rent. For example does the proposal allow for the tenant to sub lease (in part or whole) of the premises if they don’t require it any more? Are there any unfair tests? Is the landlord under a reasonable timeframe to provide its consent to a sub lease. If there is a month to respond, most tenants wont wait that long so the lessee looking to offload their premises could lose their sub tenant.
• What are the reinstatement provisions? Are they back to the same condition as taken by the current tenant, the previous tenant or back to a base building state – and what is that? A typical full ‘make good’ can cost upto $250/sqm (and more for extensive fit outs) so the finally agreed wording on this is important.

These are just a few examples.Unless a commercial tenant has in house staff with significant knowledge/ experience specifically in lease negotiations they will be at a major disadvantage compared to the landlord and agent whose business is property. An experienced commercial tenant advisor will save both money and time for any tenant looking for a sound lease for their business at a fraction of those savings made.