Commercial real estate is one of the most significant expenses for a business. And it could hurt your company in the long run if your terms are not flexible or misaligned.
In fact, even one paragraph of ambiguous language can spark years of stress and even lead to litigation. So, before you sign a commercial leasing agreement, ensure you've done your due diligence by reading through our commercial leasing checklist first.
What's the duration of the lease and is this an ideal term for your line of business?
Consider the short, medium and long-term needs of your business. If the last few years have taught us anything, it’s that there’s real value in having short, flexible lease terms. So, if your needs have changed or are likely to change consider a short-term lease with renewal or expansion rights instead.
However, if your business trajectory is clear and you want to lock in a terrific deal, think long-term.
When the lease expires, what are your options? Will you have an option to renew or extend your lease term?
While we rarely recommend exercising an option in a tenant's market, it's certainly something you want to have up your sleeve. It's especially important in markets with low vacancy rates, and where the location of your current premises is important to your business success.
Even if you plan to relocate after your initial term, we advise our clients to negotiate an option to extend because it gives you leverage when you're looking for alternative premises. It also stops your landlord from finding a replacement tenant until you decide whether you want to stay or relocate.
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Do your research to gain an understanding of rents and incentives for comparable properties and consider how your rent will be calculated - is it net, gross, face or effective?
Note that net rent excludes building costs, and effective rent is the amount payable after factoring in incentives.
Are you entitled to an incentive? If so, how much and what type (rent-free period, rent abatement or fit-out contribution)?
Commercial lease incentives are concessions or payments offered by a landlord to encourage a new tenant to sign a lease or entice an existing tenant to renew. They can be negotiated in different ways, so it's essential to understand the option that will work best for your business.
Evaluate any plans for your future business expansion to avoid paying for additional space that you might never actually occupy.
If you’re unsure about long-term needs, consider locking in a property that suits your immediate requirements and negotiating a clause that will give you the right to expand your office footprint within the same building or portfolio.
Will any other fees apply to your lease agreement? Always check the fine print as part of your due diligence.
For instance, tenants often get charged for cleaning during fit-out works where cleaning is not possible. So, negotiate that the cleaning contract is put on hold while the space is unoccupied.
Be aware of all the costs before you commit. Understand your responsibilities and ensure any wording around additional charges is crystal clear.
What does your commercial lease include? Who will be responsible for paying for taxes, insurance and other outgoings, such as council and water rates? Is this your landlord's responsibility or yours?
Commercial outgoings are the expenses associated with operating and maintaining a commercial property. They can affect a tenant's bottom line and should be a negotiating point. So, ask your landlord for a complete breakdown of outgoings during negotiations. That way, you'll be across the outgoings that you'll be responsible for and can attempt to negotiate out of any that do not align with your business.
Be aware that outgoings exclude utilities and tenant-specific costs that are directly linked to a tenant's consumption or use of the space, such as electricity, water and internet.
Before signing a lease, do a thorough background check of the landlord and the property management team by reading online reviews and news articles, and potentially speaking to other companies about their experiences. You should also reach out to local agencies to verify the landlord's ownership of the space.
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Who is responsible for maintaining the premises (including its fixtures, fittings, and equipment)? Is this your responsibility, your landlord's, or is a property manager appointed? And is this another potential negotiation point?
Who will pay for the lease set-up costs/legal costs? Be careful of clauses that stipulate that you must pay the landlord's legal costs.
It's common for landlords to ask the tenant to pay for their reasonable legal preparation fees. So, where possible, ensure that the wording stipulates that each party is to take care of its own legal fees. Or, at the very least, that the amount payable is capped.
Do you have a make-good clause in your agreement? If so, what do the terms stipulate?
A 'make good' clause is a commercial lease provision that stipulates that a tenant must return a commercial property to its original condition at the end of the lease.
Often overlooked and poorly negotiated, these clauses can lead to tenant-landlord conflicts down the track.
Read more about make goods and how to avoid landlord disputes here.
When and how can the rent be reviewed and changed?
Landlords used to insist upon market rent reviews to help safeguard their investment against lagging rents. But now, in a falling market, a rent review can benefit the tenant (as long as there's no Ratchet Clause).
Landlords will typically favour 'face' rent reviews that disregard incentives. However, we recommend that you negotiate to have effective rent reviews instead (you can learn more about that here).
Another thing to consider is how long you have to dispute a new rental amount. Lessees are usually given around 14 days to agree with or refute the new rental amount. The problem here is that 14 days is often not enough time to do your due diligence. And, if you respond too late, the new rent is deemed to be accepted. So, negotiate this point.
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Does the commercial leasing agreement allow for early termination, right of assignment or the right to sublet clause?
These clauses can provide you with greater flexibility if your need to vacate a space early because you no longer need it or because you outgrow it. However, there may be fees involved in exercising these types of clauses. So, it's essential to read any associated fine print.
How can the premises be used? It's in your best interests for this clause to be as broad as possible. That will give you maximum flexibility if your business circumstances change over time.
While you’re at it, be sure to check local zoning laws to ensure your business will be compliant with them.
If the owner isn't local, it could be tough (and frustrating) to get in contact with them for repairs and maintenance requests. And if they are local, what are their future plans? Will their investment possibly be sold to a foreign investor?
Ask your landlord for their tenant retention ratio and, before you sign, speak to a future neighbour to get a feel for the property and an idea of the landlord's reputation.
Redecoration clauses require a tenant to carry out maintenance or upgrade works after a set number of years. They're fairly common in commercial leases and are different from "make good" obligations.
Once they're in place, redecoration terms are non-negotiable. So, negotiate terms that you'll be able to comply with.
Are you required to get permits, registrations or other licenses to lease the property or undertake tenant improvements? If so, you must understand these requirements and any associated fees.
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Do you comprehend all the terms used in the lease? Commercial leases are full of jargon and fine print that can trip you up down the road.
If you're in doubt about anything, seek independent legal advice before signing the lease agreement.
This is crucial.
The commercial leasing market is highly competitive, and landlords are always eager to secure high-quality tenants. Your potential negotiating power increases further in markets with high vacancy levels (like the one we are in now) and even more so if you engage a professional tenant advisor who understands local market conditions and negotiates for a living.
At Tenant CS, we represent tenants, not landlords. With our help, you'll sleep well knowing that you've explored all of the market alternatives, pursued the right space for your business and negotiated the best commercial lease terms.
This commercial leasing checklist is a great start, but an initial conversation about how a tenant advisor can help you save time and money is quick and free!
So, book a discovery call with our team today.
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We acknowledge the Traditional Custodians of the lands on which we work. Our offices are located on the land of the Gadigal peoples of the Eora Nation and the Wurundjeri peoples of the Kulin Nation. We acknowledge their continued connection and contribution to land, water and community, and pay our respects to Elders past and present.
We’re proud to be an inclusive workplace, where diversity in all its forms are valued and every member of our team is encouraged to bring their whole self to work.
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