At first, negotiating a lease deal can seem to be an extremely daunting process. With an abundance of niche leasing terms and cumbersome clauses, it is challenging to know where to even begin and which terms of the lease are especially important to understand.
Following these seven simple steps will ensure you are better equipped to approach a lease negotiation and secure yourself the best possible deal.
Exercise Your Options Correctly
An option is an agreed term allowing a lessee to renew their current lease for a further term upon completion of the initial rental period. Option exercise windows will vary from lease to lease and once an option has lapsed there is often no recourse to a new lease, making option term clauses important to critically read, understand and properly negotiate.
The responsibility of exercising an option will always fall on the Lessee as a lease renewal tends to burden the Lessor and benefit the Lessee. Therefore, it is important to exercise your options correctly. This will require an unconditional and written notice containing:
- The date of notice
- Addressed to the current Lessor
- Identification of the shop number, location and centre (if applicable), as well as the address, state and postcode
- The statement that the Lessee(s) herby exercises the option unconditionally
- Lessee’s signature – which must be officially binding on the lease (e.g. an official officer of the Lessee, or if a corporation, all officers necessary to bind the lease)
Guaranteeing inclusion of the requisite information as outlined above, delivered within the option exercise window given, will ensure options are correctly exercised and the lease can be correctly renewed for a further term.
Also be aware leases falling under the Retail Leases Act are also privy to the opportunity for the current market rent to be determined early (contained in s 32 in the NSW Act, however, varies by State or Territory).
Don’t Just Focus on the Base Rent
It is easy to assume your base rent will cover all expenses payable to the Lessor. However, other expenses including outgoings, levies and licenses can make up to 25% of total other occupancy costs. Important items to be aware of when negotiating a lease price include: rental increases, bank guarantees, operating expenses, promotional reviews, permissible use, personal guarantees/covenants and incentives.
Making sure you are aware of these items within your lease will provide you are not misguided by merely the base rent figure, allowing you to more appropriately understand and negotiate total costs payable.
Understand Your Make Good Obligation
A make good clause sets out the requirements of the tenant upon expiry of the lease. A typical make good clause will often require the lessee to make the premises good to the condition in which it was received at the start of the contract, with allowance for fair wear and tear. The cost of make goods can range in value from a few thousand dollars into the hundreds of thousands, making it an important obligation to understand. Here are two important tips:
- Always complete a dilapidation report as this is a record of the condition of the premises at the time of the lease entry
- If you take over someone’s lease, make sure you only have to make good to the conditions you took it over at
Know Your Market Rent Review Rights
If your lease contains an option, it will most likely have a market rent review. This will usually include a provision allowing the lessee to make a written and factual submission to the determining valuer. This submission should be supported by fact and reason and if in doubt, always seek advice from a qualified specialist valuer.
It is important to note that if the Retail Leases Act applies, the lessor cannot prevent a decrease of base rent (Retail Leases Act 1994 (NSW) s 18(4)).
Mitigate Leasing Risk for New Developments
Redevelopments/extensions have become increasingly uncertain for tenants due to:
- Insufficient trade area for new development
- Additional competition from other centres
- Poor or ill-conceived design
Tenants looking to mitigate leasing risk should try and negotiate a break clause, which will give a tenant the right to break the lease, with a penalty attached. Break clauses are typically given for the second year of a lease and penalties can be 3-6 months rent or as negotiated. Adding a break clause is an instrumental tool to mitigate leasing risk if turnover targets cannot be reached.
Understand Fitout Clawback Provisions
If a fitout contribution is provided by the Lessor, under certain circumstances the Lessor may have a right to recover a percentage of the fitout contribution. For example, a lease may provide that if the lease is terminated, the Lessor will recover 80% of the fitout contribution in the second year, 60% of the fitout contribution in the third year, and so forth.
However, the 2014 QLD High Court decision of GWC Property Group Pty Ltd v Higginson held clawback provisions could be deemed penalties, making them unenforceable given they are not a genuine pre-estimate of damage. A fitout clawback provision will also not be enforceable when dealing with an assignment.
Where possible, try have these clauses removed from leases and incentive deeds or if enacted upon by the Landlord, seek legal advice.
Adjusting Rent for Atypical Shapes and Sizes
Lastly, if negotiating a lease for an unusually shaped property, you should understand the nuance of rent adjustments for atypical shapes.
For L-Shaped Shops, the front section will usually be valued using comparable evidence whilst the tail will generally either utilise a comparable overall rate or apply the cheapest rent to the L-Shape.
A property with a poor frontage to depth ratio (long and narrow) will require the division into primary and secondary rental value to properly price the property.
Following and understanding these 7 top tips will allow you to enter any lease negotiation with greater awareness and knowledge of how to acquire the best possible deal.
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.