You have finally found the ideal location for your business and are ready to meet with the landlord. Before the meeting, you will need to prioritise your needs, setting your rules and targets of the negotiation. Here are my top ten tips to arm yourself in the negotiations.
1. Lease cost
The monthly cost is determined by multiplying the square metres of the premises by the price per square metre. Divide this number by 12 to get the monthly cost.
For example in the CBD:
An office space of 500m2 at $100 a square metre is $4,167 monthly. With some locations, you can negotiate incentives like six months rent free, or 20% off the annual cost.
Often you will need to have some changes made to the leased space before you move in, especially if it is a different type of business. You can negotiate who pays for the fitout and for access prior to commencement of the lease (to complete the fitout).
3. Term of the lease
Landlords like long-term tenants, so the longer the lease you are willing to take on, the more incentives you may be able to negotiate. But as your company's needs may change, try not to negotiate too long a lease, see Rent Escalations.
4. Rent escalations
Usually, landlords do not want a fixed rent on a longer-term lease, but want to impose an annual increase based on the percentage increase in the Consumer Price Index (CPI). If this is the case, try to arrange one that does not kick in for at least two or three years. Also, consider adding:
- A predetermined, fixed amount for each year's increase;
- The option to renew your rent at a predetermined, fixed price, not "fair market" rates;
- Ways to negotiate the number of options you have.
5. Permitted use of the premises
If this clause is in your contract, negotiate it to be as broad as possible. In the future your business may diversify, or you may want to sublease some of your space.
6. Assignment and subletting
Companies should negotiate the ability to sublease or assign the lease to allow for mergers, reorganisations, and shared ownership changes.
7. Operating costs and common area maintenance (CAM)
If the landlord is passing on the Operating Costs to you, and is charging separately for these services, negotiate a fixed-fee or cap on the amount.
Do likewise for the CAM costs for the shared building areas like grounds, driveways, foyers, toilets and lifts. They are in addition to the Operating Costs.
8. Tenant improvements
Most leases state that the tenant cannot make any alterations or improvements without the landlord's consent. Ask for a clause that gives permission, with the landlord's consent, and that consent will not be unreasonably withheld or delayed.
9. Repairs, improvements and replacements
Be aware of a clause that states that at the end of the lease, the premises must be returned in their original condition.
10. Right of first offer or first refusal for additional space
A Right of First Offer obligates your landlord to present any space that becomes available in the building to you first, before marketing it to third parties.
A Right of First Refusal on Space obligates the landlord to present to you any deals he is willing to sign with third parties for space in the building, allowing you to match the deal and preempt the third party.
Renting a commercial property is a business transaction, and you should make the decision carefully, with professional assistance. After salaries, the cost of your business lease is likely to be the biggest overhead you have. A commercial lease usually involves a long-term commitment, so it is absolutely critical to get the right premises on the right terms, or it can prove to be quite a costly exercise.
Nita Parkes is the owner of Location Relocation a licensed Buyers Agency acting exclusively for Buyers looking for Property in Sydney.