We have said it once; we have said it twice: Tenants put themselves at significant financial risk if they don’t give their business enough time to prepare for a commercial lease expiry date.
This article provides you with user-friendly advice on preparing for that inevitable commercial lease expiry date, as well as negotiating a commercial lease renewal, so that you can achieve the optimal outcome for your business.
Give yourself an abundance of time
As foreshadowed above, this one of the most critical pieces of advice that we can give you. Many Tenants arrive in situations where they take crappy deals or a less than ideal premises because the clock simply ran out. Here are a few scenarios that can occur if you don’t plan ahead:
The Landlord negotiated a deal with another party
Don’t assume that the lease will be renewed. If you don’t have an option within your lease, then (in some jurisdictions) the Landlord is free to negotiate with other parties to take the space without prior notice to you. This can cause tremendous loss for Tenants because:
- You need to find another location very quickly. The result is a loss of negotiation leverage and you might get a substandard deal.
- You’ve incurred additional costs. Not only will you likely need to make-good the existing premises, but you will need to fitout the new premises.
- If your business relies on customers knowing where to find you, then your business revenue will suffer. In addition, you are likely going to incur unforeseen marketing costs to inform your customers of your new location.
You can’t renegotiate the terms of your lease
If you want to stay in the same location, you may want to re-negotiate the provisions of the lease for any additional period. This will obviously include the new rent and any lease incentives (e.g. a contribution to refurbishment). However could also include the more technical terms such as bargaining for a reduced make-good obligation, more autonomy to assign the lease etc. If you don’t have an option period in your commercial lease, then you will need to commence negotiations with the Landlord prior to any renewal documentation is agreed. This involves some significant research time. You need to define the points for renegotiation, understand the current property market and know the alternatives. As with any other type of negotiation, time provides you with leverage. You must ensure that these negotiations occur early and are conducted in an educated manner.
You go into a holdover period
If you commence the negotiations too late (or they progress slowly), then Tenants often continue to occupy the premises after the expiry date under the holdover provision. Mistakenly, Tenant’s often assume that they will continue to occupy the premises under this provision until they have completed negotiating a commercial lease renewal. However, a holdover provision provides no certainty here. Whilst not in the best of faith, a Landlord can be negotiating with other parties and abandon the negotiations. Or maybe the negotiations just come to a stalemate. Generally, the terms of the lease will state that, once on holdover, a Landlord can give you 30 days’ notice to vacate. Imagine having to find a new premises, fitout that premises and relocate your staff within 30 days. It’s impossible and your business would see some significant downtime.
You miss the deadline to exercise your option term
If you want to exercise the option in your commercial lease, you will need to give the Landlord notice (in accordance with the lease terms) that you intend to do so. Hopefully the Landlord, or the Landlord’s agent, reminds of the upcoming exercise date (in some jurisdictions they are required to by law). However, that’s not always the case.
Defining ‘an abundance of time’
Generally, we say that you should start planning for your lease renewal or relocation 12 months prior to your expiry date. However, this is quite a broad estimate and can be impacted by several different variables. For example, if:
- you have an option period, then you need to roughly add an additional 6-9 months. This is because you will need to give your notice to renew 6-9 months before the expiry date. You will want to ensure that you have researched and considered other comparable premises prior to deciding whether or not to exercise the option.
- the floor area of your premises is within the smaller range (e.g. less than 500 sqm), then you may only need 6 months.
- the floor area of your premises is within the larger range (e.g. greater than 1000 sqm), then you will want to increase your lead time to 18+ months.
Re-negotiating your lease
Negotiating a commercial lease renewal is more than negotiating the rent and length of the term for the new lease. Ensure that you don’t miss the opportunity to renegotiate the provisions of lease at the time of renewal. Review your lease and consider key provisions such as:
- make good requirements;
- ability to deal with the lease through assignment or subleasing; and
- security provisions.
Lease renewal vs relocation
As part of the process, you will be considering whether you should proceed with a lease renewal or relocate to another site. Developing leasing strategies for commercial property, and answering this question, requires a comprehensive analysis which involves significant research – it’s unavoidable. The key topics for consideration are:
- What is the state of the current commercial rental market? You need to determine the vacancy rates, commercial lease incentives, average rents in various buildings etc.
- Consider the goals of your business and ascertain whether your current location will support its future. For example, if you plan to grow your business will your current location support that growth? In the alternative, if you are looking to restructure and downsize, does your current premises offer up the opportunity to sublease some of the unused space.
- Determine how much a relocation will cost. It is not enough to simply identify a lower rental rate at another premises. You need to factor in the cost of make-goods, relocation costs, new fit-out costs etc. Only once you have quantified these costs will you be in a position to conduct a full analysis.
- Review your location. For example, will moving to a different location either increase staff retention (e.g. by being closer to public transport) or increase customer foot traffic.
Engage commercial tenant representation
The renewal process is an intricate task requiring specific knowledge about the market, landlords and technical knowledge of the lease provisions. We do encourage you to engage commercial tenant representation (we would be remiss if we didn’t plug ourselves here – Liberty Leasing – as your recommended tenant advocate) to assist you in navigating and negotiating a commercial lease renewal and/or completing a stay vs go analysis.
If you neglect to give yourself enough time to carry out the commercial lease renewal process, then it can have costly consequences. There are many factors to consider when determining if you should relocate – it doesn’t just come down to rent and commercial lease incentives. If you carry out the process with diligence you may find that relocation is the best outcome for your business. And whilst a relocation can be disruptive, this is a short term outcome for long-term savings. When your lease expiry date is approaching, don’t just assume that renewing your lease is the most cost effective way forward. Gift yourself and your business the time to carry out necessary research.
If you have any questions, or looking to appoint a commercial tenant advocate, you can contact Liberty Leasing here and we will arrange for a consultation with one of our tenant reps.
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