Commercial Tenants are business owners that specialise in delivering their chosen product or service. Landlords specialise in leasing out their properties for the highest rent they can. Because Landlords specialise in leasing out property and Tenants do not, there is often an imbalance in information and power that leads to the Landlord gaining an unfair advantage over the Tenant. Here are the five most common mistakes Tenants make when negotiating with their Landlords.
1. Always start with the MARKET RENT … NOT how much rent the Landlord wants
The lease renewal time is a natural break in the rental cycle for Tenants to reassess where the market rent actually is at that point. Naturally, the Landlord will be pleased if you just sign a renewal with a 10% increase in the rent.
So how do you measure “Market Rent”? You can think about this from a starting point of… “if your tenancy was vacant and available to lease on the open market, what sort of rent would the Landlord be chasing or what sort of rent would a Tenant be likely to pay? “ … this is the “Market Rent”.
For long standing Tenants, it is not uncommon to negotiate a rent reduction of 20% – 30% or more due to the automatic annual rental increases, moving the paid rent so far away from where the market rent actually sits.
Tenants often make the mistake of starting with what the Landlord is asking for. You should always start with the “Market” rent.
2. Do not concede to “CPI+” type of annual rent reviews
For the longest time, annual rent reviews of CPI or CPI + X% were OK. The problem with this approach now, is that CPI is running at approximately 7-8%, which could result in an annual rent increase upwards of 10%.
The best result you could achieve on rent reviews are negotiating a 3% increase, but 4% is still OK and 5% at the outside, but do not agree to a CPI related rent increase.
Tenants often make the mistake of thinking CPI is fair, since it reflects the movement in a basket of typical goods at the supermarket. That may be so, but it is too much for your business to bear and is not reasonable as an ongoing annual increase in the rent.
3. Always research the market rent 3 – 6 months prior to taking up an option
An “Option” is a powerful tool, to secure long term tenure on a location and normally requires the Tenant to tell the Landlord that they are staying, between 3 and 6 months prior to the expiry date of the lease.
Generally, the rent is the only negotiable item in an Option, for a lease to be renewed under the terms of the Option. All other terms and conditions of the lease will remain the same.
Tenants often make the mistake of telling their Landlord, that they want to take up the Option, before they have agreed with the Landlord what the rent is going to be.
To get the best result, write to your Landlord as soon as the 6 month notification window opens and ask them what their expectations are for the rent.
At this point you must have researched what the market rent is and be in a position to negotiate a new rental outcome prior to the window of time expiring.
Of course, if at that time, an agreement cannot be reached on the rent, establishing the market rent early also provides the business owner enough time to find an alternative solution.
Running out of time and leaving it 1 – 2 months before exercising your Option, severely disadvantages the Tenant and gives all the power in the negotiation to the Landlord, as they will be aware that you need to sign the paperwork at the Landlords asking rent and that they don’t need to negotiate.
4. Don’t blindly provide a “Personal Guarantee”
A common mistake that Tenants make is putting the lease in their own personal name, rather than in a Pty Ltd company and believing that they are not personally liable.
When Tenants use their own name, it will sometimes say on the lease that a Personal Guarantee is not applicable. This doesn’t mean, that the Tenant is not personally responsible, this just means that it is automatic anyway, so there is no need to list it separately.
Most leases require the Tenant to provide a Bank Guarantee or a Security Deposit, as well as a Personal Guarantee.
A Bank Guarantee or Security Deposit is likely to be equivalent to about 3 months rent, sometimes less and this is a normally accepted practice.
A Personal Guarantee means that the business owner is personally liable for the obligations of the entire lease value until the end of the lease term.
If a Tenant puts the lease in a company name, the Landlord will often ask for a Personal Guarantee from the company directors. They often say that this is “standard”. Don’t fall for this, it is NOT “STANDARD”. Leases are regularly negotiated without personal guarantees. A Security Deposit or a Bank Guarantee is often adequate for the Landlord.
5. Don’t set yourself up for a huge bill at the lease end with a make good
“Make Good” is the Tenants responsibility to remove all fixtures and fittings, removing all partitions and walls, removing all wiring back to the switchboard, capping off all plumbing, water and waste points, removing the flooring and any residual glue, removing the shopfront and / or the ceiling and lights and repairing any damage caused by the removal.
These clauses can be wildly unreasonable and favour the Landlord. A common mistake of Tenants is not negotiating this prior to the start of the lease.
At the beginning, it is all very exciting and you are not thinking about the end, but it is important to review this clause and agree on something reasonable with the Landlord, so that the Tenant is not left with a huge cost at the end for “Making Good” their tenancy.
This could be anywhere from $30,000 to $100,000 and beyond.
Your Leasing Co. specialises in representing Tenants and negotiating lease terms for Tenants. If you have any questions about negotiating the best outcome for your renewal and avoiding these costly mistakes, you can call Kelly Cunningham for a free, no obligation conversation and a free lease review on 0419 001 093.