Lease mishaps #1...no, they’re not funny!
Option Expiry
Lease documents & renewals
Make Good
Tenant Representative
We get to see lots of varying aspects of the Corporate Real Estate world. Not the least of these quite often mean we need to get involved to help our clients with things that might not have turned out quite right for them……. These are real stories.
Option Expiry. If your lease has an Option for a further lease term, it will have what is called an Option Expiry. This is a final date by which the tenant must exercise their option for the further lease term – usually by confirming in writing to this effect direct to the landlord or their agent.
On more than one occasion, we have been called in to assist clients that have missed their option expiry. In many cases we have been able to negotiate a satisfactory outcome for our clients as well as the landlord. However, we have had one circumstance where a tenant missed their option expiry and within a week had received a letter from the landlord advising them of the lease expiry – and the fact that they had missed the option expiry. They didn't want to move, but by the time we were contacted to help, a lease deal had been done with a new tenant, meaning I had to find alternative accommodation for my client and have it fitted out within 3 months (which we managed to do), but it cost them a 3 year old fitout!
The moral of this story? Keep a calendar of lease expiries and option expiries – along with rent reviews.
Lease documents. A lease 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. Recently, we had a client review their lease and option expiries for a fairly key site – well in advance and with their best endeavours.
I was asked to review a lease document, which had an expiry in the not-to-distant future and when I checked it, there was no option for a further term. This caused some significant concern, as my client had no intention of moving and the management team who originally had established the premises had moved on. So I delved a little further and found the original Agreement for Lease. This document set the terms of the transaction and ensuing lease, but what I discovered was the previous management team had executed 3 separate concurrent leases – a little unusual - the first 2 of which had no option periods. The original Agreement to Lease set this all out, but somewhere along the way, corporate memory was lost and the 2 additional leases filed away somewhere "safe".
The moral of this story? Ensure you know your obligations and the documents they are outlined in.
Make Good. This is the tenant’s obligation to repair / maintain the leased premises at the expiry of the lease. We see some angst at lease expiries when we are brought in to deal with client’s lease-end matters. It’s important to;
Understand the obligations outlined in the lease
Recognise any commencement date Condition Reports
Reconcile exit costs to budget
A client of ours had a lease over a reasonably sized office space that they had taken on an ‘as is’ basis at the commencement of their lease some years earlier, before we had any dealings. They were pleased that the existing fitout suited their requirements to a large extent and that the incentive provided by the landlord permitted further minor alterations. Another upside was this allowed them to replace furniture they didn’t think they could afford to replace.
What they didn't realise at the time, was that the lease’s Make Good obligation required them to return the tenancy to an Open Plan layout – stripping out all the fitout and repairing any damage that resulted, replacing the carpet and the ceiling tiles. This cost a considerable amount – none of which had been accrued for, although we were able to mitigate some of this through sensible negotiation.
The moral of this story? Understand your obligations and the potential future costs. Your accountant will thank you as will your banker.
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
www.thinkproperty-cre.com
brian@thinkproperty.net.au
