Negotiating a commercial property lease agreement

Negotiating a commercial property lease agreementThe first thing to realise when you are about to enter into a lease for a commercial property is that there is no such thing as a standard contract.

I get concerned that many individuals and organisations believe that commercial property leases are standard [they are not] and that any “standard” variations are simply the preserve of the landlord [they are not].

It is easy to think this is the case when you are presented with a formal document. Now don’t get me wrong – there are carefully worked out legal components to a lease agreement as laid out by professional bodies such as the Auckland District Law Society.

But it is important to realise that there is a lot more that is negotiable in a commercial property agreement than simply the length of the lease and the net rental.

So here are some tips to consider when entering into a commercial property agreement before you put ink to paper…

  1. Parties. It is important to establish clearly who the contract is between. Is the landlord named in the contract the owner of the building, a head tenant who  is sub-leasing some of their space, or perhaps individuals trading as an entity?
    It sounds simple, but clearly establishing who the parties are is critical, as is getting clear about who will act as guarantor for the lease. From my experience, the guarantee is always the subject of some debate when negotiating a commercial property lease agreement.
  2. Lease Term. Carefully consider how long you want to lease the space for and recognise that – much as when you buy a house or get married – you are entering into an agreement for better or for worse. You are locking yourself into something that can change your life. 
  3. Right of Renewal. When you are considering the right term for you, it is also important to be aware that you can negotiate a right-of-renewal at the end of the term. If you negotiate this correctly, it is not simply an option – it is a right, as long as you have not breached any terms and conditions in the lease. 
  4. Important Dates. It’s not just the lease term and right of renewal date that’s negotiable either. The timing of rent reviews is also negotiable. There is no standard or legal requirement to have rent review dates fall on a specific date defined by the landlord. 
  5. Total Occupancy Cost. A trap for young players is to fixate on the net rental but blindly accept the operating costs. There are always operating costs to take into account… and negotiate! Examples are such things as car parking, landscaping, cleaning, power, security and other associated costs.
    You need to know the total occupancy cost. It is very easy psychologically to think, “Oh, my rent is $6,500 a month”, when really by the time the other occupancy costs are factored in, your outgoings on leasing the space are $7,500 a month.
    You should also note that changes in these additional occupancy costs (operating expenses, or opex) are not limited to rent review dates. They can go up and down on an annual basis.
    At Parallel Directions we think tenants should only pay a fair share of these operating expenses. It’s such an important factor that we offer a specific product, an Opex Audit, in order to gain a very clear handle on these operating expenses and where there is room for negotiation. 
  6. District Plan. Before signing on the dotted line of a commercial lease agreement, make sure there are no restrictions on operating your business at the premises you are about to lease. You need to know the District Plan’s zoning for the premises and whether there is any resource consent required or bylaw that might inhibit you operating your business.

If in doubt, you know who to call!

Leave a Reply