Tips for Tenants – what to know.
If you’re not actively involved in commercial or industrial real estate transactions, there can be many issues that can confuse, baffle and frustrate users of this space – particularly the company ‘champion’ tasked with managing corporate real estate!
Firstly, ensure that once you have embarked on a course to secure new accommodation (whatever style this might be) that you are at least familiar with the most common lingo.
Agreement for Lease (AfL) / Heads of Agreement (HoA) – the initial commercial terms in relation to the prospective tenant and landlord’s agreement. These could include the basic financial details of the transaction, such as the rent, outgoings and incentives, as well as key dates – rent commencement, leases commencement etc. You may also find other terms of the agreement here like insurance requirements, construction details, guarantor requirements and further terms for the lease. If it’s not in here, it’s not likely to get included in the Lease, so make sure you have your wits about you with respect to what you want in or out!
Lease – this is the legal document that outlines both the tenant and the landlord obligations. There are variations to this, depending on who drafts it, but there are generally 2 different types – Law Institute Leases and Real Estate Institute Leases. The Lease will have engrossed into it, the terms of the previously negotiated AfL.
NLA – Nett lettable area. This is an important aspect for understanding as it relates to the area under lease. For example, if you lease part of a floor, there will be Common Areas on the floor as well as potentially other tenants. These are likely to be lift lobbies, kitchenettes and toilets shared by the tenants on the floor. The area you lease – as noted in your lease - should not include any of these spaces and is called NLA. When your tenancy is rented at a specific rate per square metre per annum, you are going to want to ensure this is accurate.
Make Good – this is the tenant’s obligation to repair / maintain the leased area at the expiry of the lease. This is an often-forgotten area when negotiating a lease. It can have significant importance should the obligation noted in the lease be onerous – such as removing any fitout in the tenancy, whether you installed it or otherwise. Be aware!
Rent Reviews. Generally there are three methods within a lease that can be used to vary the rental.
Fixed % increases – which are easy to budget for and expected throughout the term.
CPI increases – vary as the Consumer Price Index does so – can be tricky for some locations, but harder to budget for. Generally have to be implemented in arrears.
Market increases – the most complex review mechanism and may have difficulties for the uninitiated. This compares the rental for the space you are leasing with other, similar properties and permits the landlord to increase in line with those. Tenants will always have a right of reply – but you'll need to know your market and your rights.
Bank Guarantee. The security for a lease term is generally a Bank Guarantee. What to watch out for is the amount of the Guarantee, as your business will need to underwrite this via your bank. Another costly aspect of this security is that many landlords’ will want the security updated as the rent increases; meaning replacement guarantees every year.
Incentive relates to an amount of ‘discount’ that the landlord is prepared to provide as an enticement to lease their property. These vary wildly across the country and even from suburb to suburb. The incentive will increase as the term increases once you get above about 3 years, with the best incentives available at around 7 years. Generally a % of the total rent for the term of the lease, the incentive can usually be taken as rent free, rent abatement (reduced rent) or a contribution to your fitout. There is always an incentive – it’s up to you to identify it!
Option Period(s) or Term(s) are additional lease periods available to you – if these have been negotiated. Most landlords prefer few option periods with longer terms as it means less administration. Some landlords don’t like them at all, as they prefer to cycle tenants through their buildings.
An experienced Tenant Representative can help navigate through these waters. Think Property CRE Solutions has been working in this space for well over a decade – right across the country and into New Zealand. Our clients get us back time and time again, as we provide independent, professional advice and services that in most cases will save you more than the fee we charge.
We are Tenant Advocates.
Call Brian +61 417 011 580