In this weeks blog post we will show you how to follow these four tips to avoid the common traps which commercial tenants are too often falling victim to.
Not Completing a Dilapidation Report
Tenants can fall into the trap of not documenting the state of the premises upon entry into their lease. This may lead to disputes later in the lease term, and often becomes an issue upon the undertaking of any make good obligations which require the premises be returned to the condition which it was handed over in.
It is therefore crucial to complete a building dilapidation report before taking possession of the tenancy. You can hire a professional or complete the report yourself, however, it should include:
- Date stamped photos
- Signatures from both parties
- Important details such as the state of the air-conditioning, ceilings, walls, floors, bulkheads, sprinklers, door entries and exits
- Any existing fitout
- A survey and floor plan
- Allowance for ‘fair wear and tear’
A thorough dilapidation report will mean if you take over the premises from another party, you should only be making the property good to the condition it was at on the takeover. Moreover, when renewing a lease, the Lessee should only be responsible for making the property good to how it was upon the renewal, rather than at the time of the original lease.
Not Capping Category 1 Costs
Category 1 costs are associated with variations to essential services, for example core holes, power supply, water and gas. The lease may require the tenant to pay a certain percentage of these costs, for example 10% of the total fitout.
There exists the possibility for these costs to the tenant to quickly escalate under certain circumstances.
It is therefore critical that these costs are capped at the lease negotiation stage. You should acquire advice from your own consultant as to an estimate for the capped sum, as the calculation can be difficult. As a tenant, you should try negotiating for the Landlord to absorb as much of the cost and risk as possible. Be prepared and do your own comprehensive research.
Incentives are Not Free
For new fitouts, particularly in shopping centres, landlords are accustomed to assisting tenants with the capital cost of a fitout. However, the old saying, “there is no such thing as a free lunch” applies.
The incentive payment is amortised in the form of a “fitout rent” to recoup the capital of the Landlord. Working out the right balance between how much capital a tenant needs and the right rent is critical to the long term success of a business.
Paying for Secondary and Tertiary Space at Full Rent
A lot of retail leasing space contains what leasing professionals call secondary and tertiary space.
Examples of secondary space includes:
- Space that does not have direct sight lines to the frontage
- Very deep shops that are more than triple the frontage. For example, for a shop with a frontage of 5 metres, space beyond 15 metres deep would be considered secondary and ideally used for back of house/storage
Examples of tertiary space includes:
- Space under stairs
- Space behind walkways or columns, or covered space
- Space under 1.5 metres in height
When pricing secondary and tertiary space look at similar space within shopping centres. Compare and contrast with your own premises.
This post was authored by Simon Fonteyn. Simon is one of Australia’s leading experts in retail, childcare and medical leasing and rental valuations. He holds a Degree in Accounting & Finance, a Diploma of Valuation, a Masters of Management and is an Associate of the Australian Property Institute. With over 25 years experience in the commercial property industry, Simon founded LeaseInfo® as a way to provide more transparency to the industry.