How To Lease Good: negotiating a commercial property deal.
Finding a warehouse, retail, office, or industrial site to rent, can be tricky – check out the first blog in our series to learn more about site search.
Negotiating the terms of a lease with a commercial lessor is often much tricker.
So, how can you negotiate a deal that works for you - the tenant?
What do you need to consider? Who can you trust? And how should you handle interactions with a landlord to get the best outcome?
For companies negotiating a lease on a new site or seeking a renewal for a lease agreement that is soon to expire, what we recommend first and foremost is:
get in touch with an independent tenant representative, or another commercial property professional who exclusively advises occupiers.
Tenant Leasing Group (TLG) work with clients at a range of stages in the property sourcing and lease agreement process. Contact us for a chat.
But whether you choose us or a different provider, we will always recommend getting specialist tenant advice for non-residential lease negotiations. Why?
Networks of connections
- Beneficial relationships with agents, landlord reps, lessors, developers, lessees, service providers, and other stakeholders.
- This is how they know what sites are available when, specific landlord concessions, competitive incentives, development pipelines and off-market opportunities.
- Post-negotiation, it also pays to be linked with recommended service providers – designers, architects, construction contractors to do the space build and fit-out, engineers, networks, ventilation, and more
- Knowing who is who, how to create competitive tension, where to find leverage, and how to handle interactions with lessors from the first approach to signing a lease agreement.
- This is high-value, deal brokering skillset has no substitute.
- Knowledge of zoning regulations, use rules, site attributes and requirements, and other minutae of commercial property. Plus navigating the local transaction, policy and regulatory landscapes.
- Understanding of legal rights, obligations, and loopholes. Questions of incentives, concessions, tax, portfolio planning and other financial and deal-making considerations.
Specialized, dedicated, focused
- Most business owners, C-level leadership, and managers are already short on time.
- Both for brokering the agreement, and administering the lease – including critical dates and management – exclusive tenant representation can save a huge volume of business resources.
If you choose to go it alone...
Here is a checklist for businesses with lease negotiation requirements – followed by a breakdown:
Work out in concrete terms (pardon the pun), exactly what you need from the property lease.
Do as much research as you can – into the site, the lessor, competition, and the wider market.
Start conversations now – ask about concessions, incentives, and off-market opportunities.
Get a professional opinion – speak to a tenant rep or non-residential property advisor.
Formulate a negotiation plan that covers all key clauses and terms.
Enter and conduct formal, documented negotiations with the lessor.
Push back if your key terms are not satisfied – but be aware of how much leverage you have.
Make sure everything is in writing. Review any lease terms carefully – especially extra costs, maintenance and servicing responsibilities, and other obligations.
Have an industry professional look over the agreement, and, ideally, get formal tenant representation.
Consider your options before signing.
What do you need?
Finding the right site – in terms of size, location, zoning, premises type, clearance, fit-out and other site attributes – is the first thing to get right. For guidance on sourcing the right place for you – see our first blog in this series.
Before entering negotiations, it’s key to get clear on your needs and objectives for the lease – in terms of lease term (duration), usage, sub-leasing and other tenant rights and obligations. How long do you anticipate you will need the warehouse or retail location for? And would you like the option to renew? Businesses have a habit of growing and it’s worth factoring that into your proposal.
Lease agreements are legally binding, and there are a host of more technical clauses and lease terms that it’s best to get professional advice on. But to begin with, identifying your needs can help determine your negotiating priorities, and areas where you may be willing to compromise.
Research as much as you can.
There is public data available on commercial property listing sites like commercialrealestate.com.au and realcommercial.com.au, which may help you gauge prevailing rents, average lease terms, vacancy rates and more. The challenge is interpreting this data – as well as more technical knowledge around zoning, use rules, service responsibilities, rights and exceptions – to turn it into actionable insights for your specific negotiation: how much to offer, over what term, with what incentives?
Relationships – perhaps more than anything – are crucial in commercial real estate. Useful information about markets, sites, and positioning, often requires access to a network of stakeholders including agents, lessors, lessees, developers, and solicitors.
Headline statistics require interpretation – and without industry connections, knowledge of broader market conditions and trends, and negotiating experience, you likely won’t know how far you can push the envelope on your rent offer or incentive demand.
Lease negotiation isn’t an abstract science: there is only so far one can go with desktop research. Speaking to people, and forming relationships, are crucial.
Start conversations now.
Commercial property markets are complex and can be fast-changing. Without specialist advice, it can be time-consuming and difficult to stay abreast of vacancy rates, rental rates, average lease terms, market transactions, new developments, and other important news.
And more specifically, how fast is stock being snapped up? What concessions are landlords typically offering at the moment? What type of sites are available, from whom?
Other factors in the commercial context of the deal – the financial position of the lessor, any specific pressure points they may be facing, or how the site has been financed – are very difficult to know without intimate sector knowledge.
Most businesses only lease office, retail or industrial space once every few years, and are unaware of the immediate market dynamics and the full spectrum of opportunities available.
Starting conversations with experts – be they tenant reps, lease brokers or other occupier-aligned specialists – can help give you a sense of current incentives – rent free periods, break clauses and other favorable lease terms – and off-market opportunities.
Establishing these connections can give you leverage during negotiations with a lessor.
Do you know who you’re dealing with?
How do you know if a lessor is a trustworthy and stable entity to transact with? Do they have a good reputation? Understanding whether this is a ‘big deal’ for your landlord will inform how aggressive you can be in pushing issues. Tenant reps’ knowledge of landlords and strong relationships with real estate colleagues can help both in terms of business and personnel profiling.
Can you generate competitive tension?
The best lease deals for tenants come off the back of competition among landlords. Starting early is key – being able to afford a longer negotiation period can help your bargaining position
What concessions are you trying to win?
Lessors are often willing to offer concessions to attract and retain tenants. These include rent abatements, tenant improvement allowance, or lower security deposits, abated parking costs; and caps on annual rental rate increases.
Important lease items to negotiate.
- Lease term: consider your long-term business needs – think about how your business may grow or change over the lease term. Do you anticipate wanting to remain in the property at the end of the term? The stipulated number of months or years a lease agreement sets the context for many other lease features and obligations – not least the rental rate.
- Rent reviews: there are various rent review mechanisms – fixed increases, indexed increases, and market-variable.
- Fit-out costs: if work needs to be done on the property, can you negotiate a rent-free period and/or contribution to the fit-out?
- Early break provisions/clauses: this can give your business flexibility but can also give the lessor power to terminate the lease early. In general, leases are granted for a fixed period and early termination requires negotiating a break clause, which be a one-off right or a rolling break right.
- Rights to alter the property: structural alterations are usually prohibited, but internal, non-structural alterations can be important.
- Responsibility for repairs and maintenance: reducing cost commitments is crucial for tenants, whether that means limiting ‘make-good’ obligations at the end of the lease, or putting a cap on the service fee a landlord may try and charge.
- Is the lessor asking for a guarantee?
- Rights to transfer the lease to someone else or to sublet the property: flexibility if you no longer need to occupy the whole or part of a premises. Most commercial leases allow the tenant to transfer the lease to another business or to sub-let, but with the landlord’s consent. Be wary of statutory guarantees.
- Right to buy: uncommon, but worth considering depending on the nature of the site and the agreement.
- Obligations at the end of the lease: the default position may be that all operations must be removed. It is worth discussing this during negotiation – you may be able to leave things in place, and save money.
- Contributions and extra costs: some landlords seek a contribution for property costs from the tenant. This is not mandatory and should be resisted wherever possible. Be wary of responsibility for additional costs from operating expenses and maintenance.
And finally, review the lease agreement carefully, and, if you still haven’t – get a professional opinion.
Hopefully this guide gives you some food for thought when considering a lease negotiation for a commercial property – be it a warehouse, retail, office site or otherwise.
TLG has 50 years’ experience finding & negotiating leases for businesses with retail, industrial and other non-residential property requirements.
Any questions? Get in touch.
#HowToLeaseGood is a series about Warehouse, Office and Retail property leasing. Case studies and market insights to empower commercial occupiers.
Check out other articles in the series:
Tenant Leasing Group (TLG) is an Australian commercial property advisory specialised in sourcing and lease negotiation for warehouse, office, and multi-site retail.