Every tenant is different in occupancy needs. The space that they inspect to potentially lease will be interpreted differently. You have to be a good communicator to get to the key issues that the tenant sees as important to them. This uniqueness makes your job both challenging and interesting. Your skill in the process will directly relate to the commission you achieve.
Many tenants will compare premises that they inspect with a number of agents. It is likely that you are not the only agent that they are talking to at any given point in time. Remain firm and professional in your negotiations at all times.
So how do tenants analyse what they see and want? In the first instance, they analyse the economics of occupation. In the second instance, they analyse the benefits of occupation. Your negotiation process should balance the economics of occupation with the benefits of occupation in terms that the tenant sees attractive.
The following are the major points of concern in the early stages of lease negotiation. If you can satisfy these with the tenant, it is likely that you will move towards serious discussions of closure and a potential successful lease transaction.
- Rents –the tenant will need to understand the levels of rental to be paid at lease commencement and the way in which they are structured. The rental structure will either be on a net or gross rent basis. It is likely that the tenants do not really understand gross and net rental so be careful on this point. The common factor that impacts both rents is how outgoings on the property are to be handled and recovered; you should have had this discussion with the landlord at the time of listing before any tenants make offers.
- Landlord improvements –in most lease situations, the landlord will do some tenancy configurations in preparation for occupancy. This could be new carpet, painting, and removal of unusual or unnecessary fit out. It is possible that your tenant will want the landlord to undertake further tenancy works. This means that the initial works that are acceptable to the landlord should be quantified in cost and timing, allowing you to understand the negotiation and demands beyond that costing component if the tenant wants extra things undertaken by the landlord.
- Lease deposit –in all lease situations, the landlord’s acceptance of a lease offer must be supported by the tenant providing a deposit. In most normal situations, this amount is equivalent to at least the first month’s rental.
- Lease guarantee –it is normal in all leases for the tenant to provide a suitable guarantee for the term of occupancy. This can be in a number of forms including cash, director’s guarantees, or bank guarantees. The larger the tenancy, the tendency is to move towards bank guarantees in favour of the landlord. This means that the tenant needs to arrange a suitable bank guarantee in accordance with the requirements of the landlord. In most leasing situations, the bank guarantee should be equivalent to at least the total of a minimum of three months rental plus other occupancy costs such as outgoings and GST or value added tax. Where possible, landlords will ask for six months equivalent of such matters. If any incentive is provided to the tenant as part of the lease deal, the landlord may ask for the incentive to be added to the guarantee total. This protects the landlord’s outlay in the incentive if the lease deal falls through at a later time.
- Incentives –in some situations and in slower markets, the landlord will agree to provide an incentive to the tenant. This needs to be quantified at listing time and clearly defined as to how it will be supplied and by what mechanism. Given that the types of incentive are different, most incentive situations will not activate until the tenant has fully complied with a signed lease, provision of necessary guarantees, and payment of the appropriate deposit monies. In other words, the landlord will not provide the incentive until the tenant has satisfied all issues of occupancy associated with entering into the lease. This is an important rule to adhere to.
- Parking and costs associated thereto –parking is today essential in tenant occupancy and business function. Parking costs are sometimes part of the lease negotiation. It pays to separate the cost of parking from all other rental for the premises so that the negotiation can be separately handled. This also allows you to vary and increase the car parking costs as the tenant requires further car parks for additional staff.
- Storage and the costs associated thereto –storage is quite a common requirement for tenants. On site storage within the greater building is desirable and a leasing feature. This suggests that you can have separate storage areas in the basement of the building or elsewhere that are made available to the tenants for onsite storage. It pays to separate the cost of onsite storage from all other rental for the premises. This allows you to negotiate the matter separately.
- Signage –the tenant may require signage or naming rights on the premises. Whilst you will need to know comparable rentals of this type in your market, the provision of signage is normally a separate rental charge which will be handled individually in addition to any other rental. If the property is located on a major transport corridor, the value of exterior signage significantly increases. Whilst appropriate rental is charged for this, you will need to check with the local council to understand regulations and approvals that are applied to exterior signage.
- Rental escalations – this is the rent review process that will apply to the ongoing lease. As the agent for the landlord, you should ensure that the rental is geared to an attractive growth structure. Inexperienced agents will negotiate leases without due regard to this fact. Rent escalations that assist the landlord with stability and growth include fixed %, fixed $ amount, ratchet clauses at market review time, and CPI plus a fixed %. Many tenants negotiate for rent reviews that are indexed only to the consumer price index. Rarely does this process greatly assist the landlord with rental growth. Remember who you act for when you negotiate the rent review profile.
- Initial term of occupation –the term of occupation in the initial lease will be a key component of the negotiations. In most situations, the longer the term of occupation (say 5 years) the better it will be for the landlord unless they have a focus on renovation, demolition, or relocation. In this case, it depends on the age of the asset and the balance between tenancies. Some landlords will also look at the big picture and long term strategy where they want to support the major tenants with any further expansion space needed. This means that the smaller tenants may not be given options which could frustrate the ability of the major tenants to expand within the building. Another aspect to look at regards the initial lease term is to ensure that the lease does not expire at a similar time to other leases in the premises. This will expose the landlord to greater cash flow instability and therefore should be avoided.
- Tenant refurbishment – the longer the lease term that is agreed with the tenant, the greater the need to ensure that the tenant undertake internal painting and other cosmetic upgrades to maintain the premises in a good condition. This means that the tenant can be obligated to do these works at a frequency and to a quality agreed in the lease. It is not unusual for the tenant to be made to renovate in this way each 4 or 5 years of occupation at standards set by the landlord.
- Lease options –the tenant will usually ask for lease options. This is a further term of occupation beyond the initial term. As you would expect, this gives the tenant greater stability in business function. The matter of whether lease options should be provided is up to the landlord and is taken in balance with the intentions that they have for the future of the property. In a property of high profile, high exposure, and desirable location, it is likely that the market rental will escalate significantly as the years pass. This means that any lease options that are provided to the tenant should be shorter in duration and only be provided or agreed to by incorporating the mechanism of a market rent review at the time of option. If a lease option is provided to the tenant as part of the initial lease negotiation, it is productive to have the window of time for the expiry of the exercising of option, at least six months before the expiration of a lease. This allows the landlord to take alternative lease arrangements if a vacancy is imminent.
- Renovation, Relocation, or Demolition – as the words suggest, the landlord could want to do some things to the property in the future. In older properties, these factors become very important in the shaping of the properties future. You need to know the status of these issues before you negotiate anything with the tenant.
- Makegood provisions – at the end of the lease the landlord should obligate the tenant to undertake certain works to return the premises to a level of presentation that assists in its re-leasing. The only way you can do this is through a clear and comprehensive set of make-good provisions in the lease.
- Draft lease document –as discussions become serious between the landlord and the tenant, the draft lease document will need to be supplied to the tenant so that any matters of contention or debate can be eliminated. This process will usually involve solicitors acting for both parties. The process can slow negotiations substantially and therefore should not be left unchecked. Many transactions have fallen through because of the debate or disagreement between solicitors.
Strategy is everything in a lease negotiation. As agent working for the landlord, you need to think like an investor so that the rental provided by a lease enhances the value of the asset sensibly over time. This means that every lease you negotiate impacts the value of the property. An experienced buyer of the property will also review the leases substantially when the time of sale arises. Think ahead and make your deals work well for a number of years.
So these are the major points of discussion and negotiation in most of lease situations. If you can breach through these it is likely that you will have a successful lease occupation agreement or something close to it.