Negotiating Rent Increases in Current Market Conditions
It’s wise to pay close attention to the fine print and to make sure you are on the front foot when it comes to negotiating lease agreements in small business.
“If a business is location-specific, it’s worth nothing without a long-term lease in place. So it’s in your interest to negotiate a long-term lease with successive options”, says Peter McNamara, a partner with Sydney law firm, Clark McNamara.
Use a Great Valuer
McNamara advises people who are in the process of re-negotiating a lease to use a well-respected valuer to value the property in the process of going through rent negotiations.
“This will give you a good negotiating position with the landlord in terms of being able to provide information about comparable rents in your area, which can be used as a basis for making a rent agreement”, he says.
When it comes to negotiating rent increases, McNamara says there are three main ways of agreeing the amount by which the rent will go up: review to market, a fixed percentage increase or CPI.
“The most common is the fixed percentage because landlords want security no matter if the rental market is growing or contracting”, Tanner says, adding that the most common amount by which rents increase is somewhere between three and five percent.
Know What You’re Leasing
It’s also essential that a small business knows exactly what it’s leasing before signing on the dotted line. “Get a proper plan of the premises and check to make sure things like car spaces and storage boxes are included”, McNamara says.
Other terms and conditions to be considered include fitout contribution and potential rent free periods. “This could be a year’s rent or more, although an upfront amount will still have to be paid to secure the lease”, McNamara says.
It’s also important not to overlook the obligation to make good the premises to its original condition on vacation of the property. McNamara says this can cost around $200/square metre. If the property is 400 square metres, the cost would be $80,000.
“This is a big expense, so an option is to negotiate to buy the existing fitout for a nominal sum, say $1. Another approach is to make it clear in the agreement that the obligation to make good only covers changes to the existing fitout”, McNamara says.
It’s also important to know the contribution toward things like rates, land tax and insurances you will be required to pay under the lease terms. It’s common for the lessor to pay these costs in full and to seek reimbursement from the lessee.
Retail Leases
A Rental Bond Scheme has been set up for commercial leases, similar to the Rental Bond Board for residential leases. The scheme holds bonds related to commercial retail lease contracts.
If a retail lease provides for rent to be reviewed to market rent if the tenant exercises an option to renew, then the Retail Leases Act gives the tenant the chance to have the landlord nominate the new market rent between three and six months before the end of the lease, with a valuer determining the new market rent.
“This gives the tenant the chance to decide whether to exercise its option to renew the lease knowing the new market rent”, McNamara says. “If the parties cannot agree on a new rent, or on a valuer, then they can ask the Tribunal to decide the new rent”, he says.
Selling Your Business
If the lease is important to the saleability of your business you need to look carefully at the lease assignment provisions — can the landlord stop you assigning the lease? Retail lessees are protected because the Retail Leases Act says that a lessor can only withhold consent to assignment if the proposed assignee is going to change the use or has financial resources or retailing skills inferior to the existing tenant.
“Other commercial leases do not have this protection, and some give the landlord a complete discretion to block assignment hence, the sale of your business if it is specific to the location and there are no alternative premises”, McNamara says.
Another tip for tenants is to ensure the use of the premises permitted by the lease is sufficiently broad and covers what you will be doing. “It is not appropriate to sign a lease for a fruit shop if you are thinking of installing a coffee machine and selling coffee and cake. Similarly, it is no good stating the use to be takeaway food if you propose running an eat-in restaurant”, he says.
Above all, be honest about how you intend to use the property and hire professionals to help you do the lease negotiations. Otherwise you could end up with a protracted legal dispute on your hands.
“If a business is location-specific, it’s worth nothing without a long-term lease in place. So it’s in your interest to negotiate a long-term lease with successive options”, says Peter McNamara, a partner with Sydney law firm, Clark McNamara.
Use a Great Valuer
McNamara advises people who are in the process of re-negotiating a lease to use a well-respected valuer to value the property in the process of going through rent negotiations.
“This will give you a good negotiating position with the landlord in terms of being able to provide information about comparable rents in your area, which can be used as a basis for making a rent agreement”, he says.
When it comes to negotiating rent increases, McNamara says there are three main ways of agreeing the amount by which the rent will go up: review to market, a fixed percentage increase or CPI.
“The most common is the fixed percentage because landlords want security no matter if the rental market is growing or contracting”, Tanner says, adding that the most common amount by which rents increase is somewhere between three and five percent.
Know What You’re Leasing
It’s also essential that a small business knows exactly what it’s leasing before signing on the dotted line. “Get a proper plan of the premises and check to make sure things like car spaces and storage boxes are included”, McNamara says.
Other terms and conditions to be considered include fitout contribution and potential rent free periods. “This could be a year’s rent or more, although an upfront amount will still have to be paid to secure the lease”, McNamara says.
It’s also important not to overlook the obligation to make good the premises to its original condition on vacation of the property. McNamara says this can cost around $200/square metre. If the property is 400 square metres, the cost would be $80,000.
“This is a big expense, so an option is to negotiate to buy the existing fitout for a nominal sum, say $1. Another approach is to make it clear in the agreement that the obligation to make good only covers changes to the existing fitout”, McNamara says.
It’s also important to know the contribution toward things like rates, land tax and insurances you will be required to pay under the lease terms. It’s common for the lessor to pay these costs in full and to seek reimbursement from the lessee.
Retail Leases
A Rental Bond Scheme has been set up for commercial leases, similar to the Rental Bond Board for residential leases. The scheme holds bonds related to commercial retail lease contracts.
If a retail lease provides for rent to be reviewed to market rent if the tenant exercises an option to renew, then the Retail Leases Act gives the tenant the chance to have the landlord nominate the new market rent between three and six months before the end of the lease, with a valuer determining the new market rent.
“This gives the tenant the chance to decide whether to exercise its option to renew the lease knowing the new market rent”, McNamara says. “If the parties cannot agree on a new rent, or on a valuer, then they can ask the Tribunal to decide the new rent”, he says.
Selling Your Business
If the lease is important to the saleability of your business you need to look carefully at the lease assignment provisions — can the landlord stop you assigning the lease? Retail lessees are protected because the Retail Leases Act says that a lessor can only withhold consent to assignment if the proposed assignee is going to change the use or has financial resources or retailing skills inferior to the existing tenant.
“Other commercial leases do not have this protection, and some give the landlord a complete discretion to block assignment hence, the sale of your business if it is specific to the location and there are no alternative premises”, McNamara says.
Another tip for tenants is to ensure the use of the premises permitted by the lease is sufficiently broad and covers what you will be doing. “It is not appropriate to sign a lease for a fruit shop if you are thinking of installing a coffee machine and selling coffee and cake. Similarly, it is no good stating the use to be takeaway food if you propose running an eat-in restaurant”, he says.
Above all, be honest about how you intend to use the property and hire professionals to help you do the lease negotiations. Otherwise you could end up with a protracted legal dispute on your hands.