Commercial lease 5 or 5x5

[WebBoard]

From: Glenn S


A Quick question on commercial leases.

Is there any advantage in a 5+5 lease over a 5 year only lease for the Investor? Or does this only benefit the lessee, and may be detrimental to the landlord?

Glenn

 

[Kristine..]

Reply: 1
From: Kristine .


Glenn

What is the question?

Commercial values and rental or potential rental are inextricably linked. Unlike residential, whereby a vacant, owner occupied or tenanted house minimally, if at all, impacts on the market value of the property, in commercial, rental is paramount.

The Retail Tenancies Act in Victoria has definitions of enclosure eg size of premises, and experience of the tenant. For a first time retail tenant, they must be given the opportunity of at least five years minimum.

Options work in everybodies best interests. The tenant can plan ahead, knowing that the landlord cannot 'unreasonably refuse' to continue with the lease, should they, the tenant, choose to exercise their options. The landlord knows that they will have an income for a specified period, and the likelihood of a further specified period. Market Revue clauses will ensure that the rent does not decay or rise unfairly, during that time.

You may have noticed, that commercial property is often put on the market early in a new lease, where the incoming investor can buy maximum benefit and security.

However, if you own commercial property and are planning to extend, redevelop or whatever, and do not want to offer options with the lease, be prepared to wait for a tenant, or to only attract 'fly by night' businesses. Why go to the trouble of etablishing a business, when the landlord isn't offering the opportunity of longevity of location?

Having been a commercial tenant and a commercial landlord, believe me, even 5 + 5 is a bit short for my liking.

But of course, without knowing the full circumstances of your question, I hope this answer is of some help

Cheers

Kristine

 

[WebBoard]

Reply: 2
From: Glenn S


Thanks for the reply,

The Question is as far as a landlord is concerned.

Is there any benefits in a 5x5 vs a 5 year straight?

To My thinking, there is no guarantee to an additional term so there appears to be no difference to the landlord if its a 5 or a 5x5 or a 5x5x5, as the tenant can still vacate at the 5 year mark anyway.

thoughtfully

Glenn

 

[DaleGG]

Reply: 2.1
From: Dale Gatherum-Goss


Hi Glenn

No there is no tangible benefit in agreeing to such a lease. However, there is a benefit in making the property available for a long term lease which is what we all crave.

Personally, and professionally, I would offer the longer term and options as a land lord. You have nothing to lose and everything to gain.

Dale

 

[Kristine..]

Reply: 2.1.1
From: Kristine .


Yes, but ....

Dale, what options are available to a landlord? The law says that a landlord may not unreasonably withhold consent to a further term, or to the tenant remaining on, on a periodic basis.

A landlord cannot 'option' to require a tenant to continue.

Therefore, the tenant, being the one who pays, has the right to continue or right to decline to continue.

What other 'options', that is, alternatives, are there?

Generally speaking, the landlord rents the tenant the bare shell. All fixtures, fittings and improvements belong to the tenant. Just as an example, a local hot bread shop (you probably have bought his award winning pies) invested over $100,000 in plant, equipment, shop outfitting etc. Would the baker do that, if he didn't think there was a possibility of continuing indefinitely in the premises? If he thought that the landlord might be a 'tricky' sort of person, likely to refuse to continue the tenancy & thus effectively 'confiscate' the shop outfit, trade and goodwill at the end of the term, would the tenant take that chance?

By providing a good lease, with plenty of options, the tenant can improve the business, grow the goodwill, and sell the business to a new operator, who can then calculate "Well, I'm paying $150,000 for the business, plant and goodwill, divided by the term of the lease, equals so much per year for the cost of the business. If I can afford to buy, amortize the purchase price, and still make a living, I'm a happy Vegemite.

In my opinion, it is in the best interests of the landlord to have a proper, fair and equitable lease drawn up at the beginning, with plenty of opportunity available to the tenant to establish themselves, providing prosperity to both parties.

And if the property comes under the Retail Tenancies Act, there is a fairly level playing field regarding market rents, ratchet clauses, minimum terms, outgoings, operating costs etc. It is easy to overlook the costs of vacancy. Some retail, commercial and industrial areas have not yet recovered from the 'recession we had to have', although vacancy rates are definitely improving. For my money, a 5x5x5x5x5 lease would allow a quality tenant to commit themselves to the business effectively for their working life, and the opportunity to sell, not close, at the end of it.

And ditto for the landlord

Just my thoughts on the subject

Kristine

 

[DaleGG]

Reply: 2.1.1.1
From: Dale Gatherum-Goss


HI Kristine!

We agree wholeheartedly and I apologise if my original post was not clear. Yes, as a landlord, I would prefer to offer long term leases (ie, 5 x 5 x 5) every time.

As I said, you have everything to gain and nothing to lose.

Dale

 

[Sim]

Reply: 2.1.1.1.1
From: Sim' Hampel


Maybe it's the mathematician in me, maybe I'm just pedantic... but I would think it should be 5+5+5, as 5x5x5 implies something way too long ! ;-)