Cost to prepare a commercial lease

[Wake]

Can anyone give a guide as to how much we should expect to pay for a solicitor to prepare a commercial lease? We are going to lease out part of our SMSF owned industrial unit. At present our own business rents the entirety from our SMSF. A condition of our SMSF loan is that any lease/sub-lease/partial surrender etc must be approved by the lender and then registered.

The quote from the solicitor is $2300 plus expenses and they reckon they are not charging us to alter the existing lease ie this cost is supposedly only to prepare the new lease for the new tenant for a 2 year period with a 2 year option. I can't find any information to use as a comparsion but thought that sounded a bit expensive?

Wake

 

[RPI]

That sounds about right to me, but the cost should not be yours. That is a cost the incoming tenant pays not you. Just one of the benefits of commercial.

 

[moyjos]

is the entrie property being leased by you ??

You are not likely to damage your own property so why not just go with the bog standard REINSW form?? (cost $8.53)

http://www.reinsw.com.au/shop/Productinfo.aspx?productid=FM00900

Entirely different if you have other tenants and you want to add specific clauses regarding use.

 

[Wake]

We are going to let the floor of the factory out to another party, while our business retains the mezzanine office space. I know the tenant is supposed to pay the costs of the lease prep, but I guess I wanted to check the quoted cost in case he complains about it being too high. RPI, if you think that sound about right then thanks for confirming for me.

Does a 2 year lease have to be registered? I thought not, but being a mortgaged property I think that's causing extra work...

 

[Dazz]

I wanted to check the quoted cost in case he complains about it being too high.

We paid a solicitor $ 1,500 back in 2004 for a commercial lease to be drawn up for one of our industrial sheds.

It had bigger holes in it than the doors to the shed.

Over the years it has been refined and modified, every time we discover either a hole or something that should have been added, I change it.

Eight years later and we're up to modification # 16, and by now it is what we expected it to be in the first place. It's not water tight yet, but pretty damn close to it.

The cost is one thing Wake.....the bigger aspect is the quality of it. Sometimes, the rent ain't the biggest thing.....good clauses can save you a fortunate.

Unfortunately, you don't have the experience to make a decision or know whether the solicitor that will provide you the paperwork is rubbish or good.

Like all service providers (mechanics / accountants / lawyers / sparkies)....you're in that grey zone as a consumer where you're gonna have to trust your selected choice of service provider.

The price they charge you is more a reflection of how they rate themselves, rather than whether the product or service is any good.

As I said, you're in that zone where you don't know.

Unfortunately, that is a huge loop hole in the way the world works.....and only through costly and painful experience can you ever hope to nail down the nitty gritty so you do know.

This forum only goes so far. The nitty gritty doesn't get discussed on here any more. The tall poppy harvesters patrolling have put paid to that.

 

[Terry_w]

is the entrie property being leased by you ??

You are not likely to damage your own property so why not just go with the bog standard REINSW form?? (cost $8.53)

http://www.reinsw.com.au/shop/Productinfo.aspx?productid=FM00900

Entirely different if you have other tenants and you want to add specific clauses regarding use.

If you are leasing from your SMSF then you may think that the lease doesn't really matter as you are leasing from 'yourself'. But you need to be careful for a number of reasons such as the trustee must enter into a legally binding agreement to lease the trust assets and what happens if one party becomes insolvent - you would then need a tight contract to protect the other party.

 

[Wake]

Thanks Dazz. Hopefully the lease will be good, and hopefully we never have to test it, but that's just more of the joys of investing I guess!

When the same solicitor prepared the lease for our business to rent from our SMSF, the terms seemed fine to me, but of course I'm not planning on doing a runner, damaging property etc. We decided not to charge ourselves a security deposit but from memory that was the only exception.

Because the bill for that work included some other stuff too I didnt know the cost of just the lease prep component.

 

[Scott No Mates]

The most recent leases which I have had prepared by my solicitor have cost around $1500 + GSt & registration but the cost has been borne by the tenant.

If there are additional circumstances it may cost a little more (things required for the SMSF/variation of lease/sub-lease etc).

 

[cu@thetop]

The most recent leases which I have had prepared by my solicitor have cost around $1500 + GSt & registration but the cost has been borne by the tenant.

If there are additional circumstances it may cost a little more (things required for the SMSF/variation of lease/sub-lease etc).

That's about what I charge for a standard lease but variations will be:
Who pays for it- if tenant (ie not my client) then more- if client to pay less.
Rental. A rental of 200k/pa opens me to a bigger negligence risk than one of 50k rent pa.

Here's what to look for (there is heaps more but here's a start)

Big rental bond 6 months plus gst as a cash bond held by you or non lapse bank guarantee
Personal director guarantee for corporate tenants
Maintenence issues esp lifts and air con- load service and capital costs on tenant if you can
Outgoings to tenant
Make good clause during occupation and on their exit.
Rent review clauses- put a market review at least every 5 years or earlier if option- make a rachet clause where possible (if legislation allows it)
Tight permitted use clause
Tigt insurances by tenant noting you as an interested party
No use that will contaminate property- truck repairs dumping oil and brakefluid come to mind
Mezzanine floor? Check certifications are in place as your insurance (or theirs) may not cover a collapse if a "latent" defect causes loss.


Here's a thought. For 100 bucks go to your titles office and ask for a copy of a registered lease over one of the neighbouring units and tack the time to read it.

Enjoy.

 

[cu@thetop]

The most recent leases which I have had prepared by my solicitor have cost around $1500 + GSt & registration but the cost has been borne by the tenant.

If there are additional circumstances it may cost a little more (things required for the SMSF/variation of lease/sub-lease etc).

That's about what I charge for a standard lease but variations will be:
Who pays for it- if tenant (ie not my client) then more- if client to pay less.
Rental. A rental of 200k/pa opens me to a bigger negligence risk than one of 50k rent pa.

Here's what to look for (there is heaps more but here's a start)

Big rental bond 6 months plus gst as a cash bond held by you or non lapse bank guarantee
Personal director guarantee for corporate tenants
Maintenence issues esp lifts and air con- load service and capital costs on tenant if you can
Outgoings to tenant
Make good clause during occupation and on their exit.
Rent review clauses- put a market review at least every 5 years or earlier if option- make a rachet clause where possible (if legislation allows it)
Tight permitted use clause
Tight insurances by tenant noting you as an interested party
No use that will contaminate property- truck repairs dumping oil and brakefluid come to mind
Mezzanine floor? Check certifications are in place as your insurance (or theirs) may not cover a collapse if a "latent" defect causes loss.


Here's a thought. For 100 bucks go to your titles office and ask for a copy of a registered lease over one of the neighbouring units and take the time to read it.

Enjoy.

 

[Wake]

Thanks cu@thetop for that info. Unfortunately some of it doesn't apply to our situation.

Tenant will be leasing approx 75m2 of the factory ground floor for $300 + GST.
No outgoings because no separate metering of services between mezz and factory floor.
Solicitor recommended 3mnths security deposit plus personal guarantee of director.
Only working components are the high clearance roller door and bathroom.
Every other factory in the complex of 20 is owner occupied except 1.

You can see we are not talking about big corporate business here but of course we still need to be protected. So if you would charge approx $1500 + GST would it be fair to assume the extra work associated with the SMSF/lender requirements could increase it to approx $2300?

 

[Terry_w]

Thanks cu@thetop for that info. Unfortunately some of it doesn't apply to our situation.

Tenant will be leasing approx 75m2 of the factory ground floor for $300 + GST.
No outgoings because no separate metering of services between mezz and factory floor.
Solicitor recommended 3mnths security deposit plus personal guarantee of director.
Only working components are the high clearance roller door and bathroom.
Every other factory in the complex of 20 is owner occupied except 1.

You can see we are not talking about big corporate business here but of course we still need to be protected. So if you would charge approx $1500 + GST would it be fair to assume the extra work associated with the SMSF/lender requirements could increase it to approx $2300?

What extra requirements are there for a SMSF?

 

[cu@thetop]

Thanks cu@thetop for that info. Unfortunately some of it doesn't apply to our situation.

Tenant will be leasing approx 75m2 of the factory ground floor for $300 + GST.
No outgoings because no separate metering of services between mezz and factory floor.
Solicitor recommended 3mnths security deposit plus personal guarantee of director.
Only working components are the high clearance roller door and bathroom.
Every other factory in the complex of 20 is owner occupied except 1.

You can see we are not talking about big corporate business here but of course we still need to be protected. So if you would charge approx $1500 + GST would it be fair to assume the extra work associated with the SMSF/lender requirements could increase it to approx $2300?

Possibly but only cause I undercharge. Tenant is responsible for the regular servicing of the roller door in accordance with manfacturers specifications or evry 6 months at a minimumn.

 

[cu@thetop]

What extra requirements are there for a SMSF?

None really- as long as the smsf can enter the agreement under terms of the trust- and treated as an arms lengtj transaction I expect.

 

[Wake]

When the SMSF borrowed to buy the factory the lender made it a condition that we required a minimum 5 year lease, which of course has to be registered. It was always our intention to rent part of the unit to our business and rent the floor space out separately to achieve the higher yield we wanted. For various reasons that didn't happen from day 1 so our business currently has a lease for the whole premises. Any changes to that lease have to be approved by the lender which means re-registering etc.

Not having bought commercial property before I assumed this was a restriction due to it being a SMSF loan, but perhaps its common to all comm loans? Anyway, the lender requirements are just adding an extra level of complexity and cost to it all. I have to ring the potential tenant tomorrow to let him know the prep costs so hopefully they don't object. Its taken a while to find the right person. We could have rented it sooner to a well known bikie gang who wanted to fit it out as a club house - complete with urinals along the wall etc Hubby politely declined despite being told he would be welcome to come along any evening.

 

[handyandy]

Just leased out a 500sm factory/office. The lease cost the tenant $1000 plus outgoing. This was based on the solicitor not being involved in any negotiations.

I spent a bit of time phoning the local firms and they were all quoting about the same price.

Like you I had no idea what the cost would be and also thinking that I would be paying.

How did you find the tenant, through an agent? If the term is for no more than 3 years so get them to prepare a standard lease with your conditions attached.

Remember that this is a lease between you (your entity) and the new tenant with the only tie to the SMSF being your lease. What does your lease say about sub leasing? If you ignore the condition of the loan re sub leasing will the bank really care?

At $300 per week it's not a lot of money to bother going through all the registration BS - the bank will also charge to register the lease.

I would spend some money on a separate electricity meter and charge the tenant for the electricity. I am sure you could get an internal meter and what should be a simple rewire of the distribution board so that you can track their usage.

If they are high water use type concern than the same goes for water.

Just make it a condition of the lease that they pay based on your electricity rate etc on presentation of bill from you.

If you do go down the path of using a solicitor then based on my recent experience find one that regularly does commercial leases because he will bring experience to the table.

Cheers

 

[James m Dawson]

A good lease can save headaches later

I agree with Daz here I've had some nightmare leases in the past that have cost me a fortune because they just weren't done properly. You can be stuck with the things for years so it is worthwhile spending a bit of time and some money to get it right. I personally always use a solicitor to do my leases, I operate the few different states so things can vary a bit. When I first started investing in commercial property I really didn't read them , I was so excited to get a tenant signed up ! I quickly realised that a bit more effort upfront can save a lot of drama down the track.

We paid a solicitor $ 1,500 back in 2004 for a commercial lease to be drawn up for one of our industrial sheds.

It had bigger holes in it than the doors to the shed.

Over the years it has been refined and modified, every time we discover either a hole or something that should have been added, I change it.

Eight years later and we're up to modification # 16, and by now it is what we expected it to be in the first place. It's not water tight yet, but pretty damn close to it.

The cost is one thing Wake.....the bigger aspect is the quality of it. Sometimes, the rent ain't the biggest thing.....good clauses can save you a fortunate.

Unfortunately, you don't have the experience to make a decision or know whether the solicitor that will provide you the paperwork is rubbish or good.

Like all service providers (mechanics / accountants / lawyers / sparkies)....you're in that grey zone as a consumer where you're gonna have to trust your selected choice of service provider.

The price they charge you is more a reflection of how they rate themselves, rather than whether the product or service is any good.

As I said, you're in that zone where you don't know.

Unfortunately, that is a huge loop hole in the way the world works.....and only through costly and painful experience can you ever hope to nail down the nitty gritty so you do know.

This forum only goes so far. The nitty gritty doesn't get discussed on here any more. The tall poppy harvesters patrolling have put paid to that.

 

[Wake]

Thanks to all for the replies. Its a bit of a drama - the tenant is only going to pay $300 + GST for his space, and between the cost of our solicitor and then his own to read the lease and advise him its going to cost him about 4 months rent! That's life I guess.