Lease mishaps #2 ...no, they’re not funny!!
We get to see lots of varying aspects of the Corporate Real Estate world. Not the least of these quite often means 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.
Bank Guarantee. A Bank Guarantee (BG), as distinct from a Guarantor, provides for security over the performance of the Lessee under a lease. It can be drawn down and used by the Lessor to remedy breaches under the lease, which can vary considerably, from Make Good to rent arrears. This could also be a Bond, but generally these days in Commercial & Industrial transactions a BG is required. It is usually a percentage or number of months of the lease term.
A client recently approached us to review their lease obligations due to a notice of a breach under their lease. It related to the Bank Guarantee and they couldn’t understand what they had done. After a short review, it transpires that the BG originally in place was linked to increases in the rent, but the tenant had never replaced the BG, meaning that the value of the BG was less than the obligation under the lease. An easy fix in this instance, but with ongoing administrative cost.
The moral of this story? Make sure you are aware of your obligations under your lease. We lean towards negotiating a fixed BG for the term of the Lease.
Rent Review. This is the mechanism by which the rent can be increased (or decreased) during the term of the lease. There are a number of forms that this can take;
Fixed amount or percentage increase. This is a mechanism that’s easy to budget for, not complex to administer and provides some certainty during a lease term. Most likely a percentage increase, be aware that you can negotiate this rate.
CPI increase is a simple as it sounds. Generally the local capital city’s CPI increase for the period immediately prior to the rent review date, it means a wait for the figures to be published and a catch up invoice to cover the shortfall. This has been good for Tenants over the last number of years as CPI has remained relatively low.
Market Review. This is when the leased premises are compared to others in the marketplace to determine a revised rental. This can be the most complex review and sometimes can lead to tension between Lessor & Lessee. Generally, the Lease requires the Lessor to nominate the ‘new’ rental from the review date and provide notice to the Lessee prior to this date. The Lessee does have the right to dispute the rent and in some cases it may even be reduced if the wording in the lease is dealt with appropriately upfront. If the parties don’t agree, there’s usually a dispute resolution process that adds cost to both parties.
The moral of this story? Make sure you know what your reviews entail. They could vary during the term and usually will involve a market review a some point.
Relocation Clause. This is pretty much as it sounds and gives the Lessor the right to move a tenant to another location even another building. This can be a sleeper, with many Tenants unaware of the implication of getting this wrong upfront. It can however, in certain circumstances, be a benefit of a lease if the tenants’ premises are damaged or destroyed by placing a positive obligation of the Lessor to provide premises for the Lessee.
A Tenant came to us for help as they had been provided notice from their Landlord that they were going to have to move to another building, as the building they occupied was to be redeveloped. They felt that as they had a current lease that the notice shouldn't apply to them.
The lease contained a redevelopment clause and a relocation clause, that stipulated that the Lessor had the right to move the tenant(s) to another of their buildings in a different location should they determine that they were going to redevelop the site. The Tenant did not like the new location, and the rent appeared too high for the building, but the Landlord was to cover the cost of relocation and fitout. In the end, the tenant was able to negotiate a better deal on the rent and a higher rate for their fitout, but had to move nonetheless.
The moral of this story? Review your lease thoroughly to ensure you understand the Lessor’s rights that you have agreed to.
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