Are You Being Screwed Over By A Ratchet Clause?

Ratchet Clause

Most commercial tenants have at least one rent review over the term of their lease. Often the rent review will be the first time that a commercial tenant will experience a nasty shock when their rental increases at a rate that they feel is completely unfair. Bewildered tenants complain to their landlord, to be told that their rent review has a ratchet clause, so the rental can only be increased, never reduced. Worse still, if their lease has several rent reviews in it, the ratchet clause ensures the rental will always will always increase, in other words, the ratchet clause is a One Direction only movement.

When will the ratchet clause affect you?

Ratchet clauses are often found where the landlord uses an ‘old style’ in-house lease form. Smart tenants will try to get the landlord to agree to use ADLS lease which contains terms that are fair to tenants as well as landlords. Other options include getting the landlord to agree to modifying the rent review clause

Recently we advised a commercial tenant who was frustrated with its landlord.  Our client had wanted to have a longer-term lease over large office premises.  The landlord required frequent rent reviews, with a ratchet clause impacting the rental at each review. With our advice, our client persuaded the landlord to agree the rentals would reduce if the current market had dropped, provided the rental did not go below the commencement rent. This change has provided our client with confidence that it will be paying a fair market rental and potentially saved them considerable cost. As the old saying goes: “the devil is in the detail”.

Don’t be hurried into signing a premises lease agreement.

For over thirty years Parallel Directions Ltd has advised commercial tenants on leasing matters. The ratchet clause is only one of the terms and conditions that need to be carefully considered before committing to a lease. After all, we all want to avoid being screwed over by the ratchet clause or other traps and pitfalls in commercial leasing.

If you’d like to discuss your ‘Ratchet Clause’ query, please contact us.

Good Long Term Planning is King to Getting the Best out of Auckland’s Commercial Property market

As much of Auckland’s residential market is ‘going off’, so too is our commercial property as business confidence grows and space becomes more heavily in demand.

My recent experience in Auckland commercial property demonstrates that the property market is turning in favour of the landlord as we find them firming up on the rentals and reducing tenant incentives to lease space in their buildings.

For organisations that lease their premises, the honeymoon is now almost over. With more tenants chasing less vacant property, no longer can tenants pick and choose where they move to, or drive extraordinary lease deal.

Remember when you could spend a few minutes searching on the internet to find the next great property location for your business? Already those days are gone – to play effectively in this dynamic market we need to be more agile, better prepared and deeply thoughtful of what part property plays in your organisation.

It is not uncommon in New Zealand for major decisions (such as property matters) to be made in off-shore regional offices or headquarters. In a market where those tenants that are slow to make decisions miss out, we have assisted the local management in preparing business cases, market reports and opinions on the commercial aspects of leasing.Our New Zealand clients have found this approach has enabled their off-shore decision makers to make informed decisions faster.

Whether yours is an international corporate with hundreds of staff, a medium sized or smaller organisation, the principles of leasing are the same: Always know what’s in your lease and have a plan for how to deal with anything as it comes up.

As an example, here are four simple questions that you should know the answers to.
• How long until your lease term expires?
• Is it in the next six to twelve months?
• In the next twelve to eighteen months?
• Are there any rights of renewal in the lease?

 

(a) If your lease expires in six to twelve months you will need to take immediate action (see below).
(b) If your lease expires in the next twelve to eighteen months you need to set up a project and start thinking and planning what your business requires from the property. There’s really not much time.
(c) Decide if the organisation should Stay or Go, e.g. renew the lease or Relocate to a new place.
(d) If there are rights of renewal in the lease, the same process should still be carried out. What you find out may be useful if you wish to renegotiate the lease renewal terms and conditions.

Five Point Action Plan
Here is an action plan to get you started on developing the agility and readiness required.

1. Check your lease document to identify the lease expiry date.
2. Identify/ confirm your organisation’s property needs. For starters, ask yourself:  How much space do we really need? and How will the property support our business plan?
3. Get management/ Board support for setting up a project that reports monthly on these critical property matters.
4. It is critical to become smart and agile in this increasingly demanding property environment. Plan to acquire the resources to achieve these.
5. Get professional, independent advice.

I will be happy to assist you to develop the agility and knowledge required. Please feel free to contact me to arrange a get together to discuss your property needs and how to get the best out of the Auckland property market..

Kind regards
Peter Scott
Executive Director
Parallel Directions Ltd
pscott@paralleldirections.co.nz

The Three Wins For Business in Auckland’s Urban Density Battle

The fight for space in Auckland is reaching new heights as the city’s 30 year plan starts to grind through to its final stages.

Without a doubt urban density has been the number one issue as the Auckland Council has drawn up it’s Unitary Plan and put it out to the public for submissions.

Submitters ranging from private individuals to corporations and government departments are all having a lot to say about the pros and cons of denser housing and business districts.

It is a sign of our times. And hard up against it is the increasing hot debate about property values in Auckland.

These issues are not going to end any time soon.

So what’s in it for business?

I believe it is like all looming crises. There is always some great opportunities in tough times through innovation and thinking creatively.

I see three wins for business in property planning.

Win One:

The immediate upside is that property developers, architects  and engineers are already coming up with a wider range of solutions for commercial buildings and workspaces. One size fits all no longer cuts it. The luxury ofgreenfields planning is starting to become a thing of the past.  Brownfield sites and mixed use developments are going to be on the up and up. This provides great opportunities for custom-made solutions that can end up being both more cost effective and good for your brand.

Win Two:

The opportunity to take a close look at what space you really do need and where you should be located. The trends towards hot desking, remote working, doing business online, Just in Time (JIT) strategies about holding stock is revolutionizing our way of thinking about the space we need.  Unless there is a sense of urgency we often put up with premises that are less than ideal.  Resizing or shifting is not always a costly move.

Win Three:

Thinking about being close to home.

The successful businesses of the future will be those that have got their heads around the fast changing dynamics of doing business on the move, having flexible workspaces that will shift and change according to business strategies.

Being in the right place at the right time will enable you to attract the best staff,  and clients.

The real opportunities in Auckland will be around doing some smart thinking about location of work forces and work places. It is not going to be all about the CBD, its fringe and traditional industrial zones. Mixed use developments are on the up and up. One particularly interesting place to watch will be New Lynn.

So if you’re sick of the endless debates about the pros and cons of urban density; think creatively about what opportunities there may be.