My commercial lease

[steveadl]

Hi all, I'm about to renew the lease on my current business premises, so thought I'd keep a thread of it going in case people can offer me advice along the way.

One things for sure - it's not as nice to be on this side of a property compared to where I usually sit!

Brief background is it's a small services and retail business with myself and 3 staff, operating 6 days a week. For those of you familiar with Adelaide - it's on The Parade at Norwood. It's a 'high street' fashion precinct with 2 supermarkets, Hoyts cinema chain and around 200 odd specialty shops. There are 2 malls with a supermarket and specialty shops in each, but the majority of the strip along the main road is just individual buildings and landlords. Lots of Cafes and resteraunts and fashion boutiques etc.

The rents are some of the highest in Adelaide. Whilst the amounts are less than Westfield rents for example - the amount of traffic walking by makes it relatively more expensive in my view. They have been increasing fairly highly in recent years. The shop 3 doors down from me (different LL) was re-let to a new tenant just over 1 year ago for a 50% increase in rent. Granted I think the old lease was probably a bit under market - but you get the idea.

I am going to have a talk with neighbouring shop owners to try and find out what they are paying. My landlord has always been notorious for charging very high rates (compared to other local buildings). He was quite happy back in the day to leave a shop empty for 6 months until he got the rent he wanted. This was a few years back, in the subsequent years - demand has far outwayed supply with plenty of businesses clamouring to get into the area, so that would not likely happen anymore.

I have always intended to renew my lease this year as I have another 5yr option. Moving my business is not an option as the supply of premises in the immediate area is non-existent. Moving would also be disasterous unless it would be very close by, which as I said would be near impossible.

Property prices along the strip have increase dramatically in recent years, including in the last year alone. One building sold for $5M on a 900m2 block that has just been half gutted, and half demolished. They are building a bank on the back, and new shops on the front. About 6 months later - a single bank building (likely heritage listed) on land of 375m2 sold for $6M. To give you an idea of the property returns on the strip one particular building that was purchased for $900k back in 1999 would likely fetch around $12M now (bit better than doubling every 7yrs eh!) by my guess.

Anyway, the first step has begun. I received a letter today from the LL's agents asking me whether or not I intend to exercise my lease for a further 5yrs.

I would think this first letter is pretty straight forward - they just want a yes or no answer as to whether I intend to exercise my option to renew for a further 5yr term. I have replied along the lines that I do intend to exercise the option, and look forward to hearing from them soon. What I am not looking forward to is the new lease $$$ figure.

So that's the story so far. Anyone have any advice or questions?

 

[Dazz]

Property prices along the strip have increase dramatically in recent years, including in the last year alone. One building sold for $5M on a 900m2 block that has just been half gutted, and half demolished. They are building a bank on the back, and new shops on the front. About 6 months later - a single bank building (likely heritage listed) on land of 375m2 sold for $6M. To give you an idea of the property returns on the strip one particular building that was purchased for $900k back in 1999 would likely fetch around $12M now (bit better than doubling every 7yrs eh!) by my guess.

G'day Steve,

You must be mistaken. I've read lots of internet links and many experienced property authors and investors alike who all say that the capital gains on commercial property is nearly non-existent.

The figures you are quoting simply can't be true....surely. Can you provide an internet link so I can verify what you are saying. The weight of opinion is very much stacked against you, and some of the authors and investors are very experienced.

As to the rental returns asked for, well that can't be true either. Any more than 3 or 4% increase per year and I wouldn't believe you, without another internet link.

I've heard it's very risky all round. Definitely not for me. I'd be so fearful of the tenant leaving. Oh, I bet your Landlord doesn't sleep at night. His/her SANF must be negative....I know mine would be in a situation like that.


P.S. I hope your LL or their agent doesn't read this forum. You might find the market review on option take up might be ~ 150% or 200% over an above what you are already paying.

How much of an increase can you business handle before you would have to leave ??

 

[steveadl]

G'day Steve,

The figures you are quoting simply can't be true....surely. Can you provide an internet link so I can verify what you are saying. The weight of opinion is very much stacked against you, and some of the authors and investors are very experienced.

As to the rental returns asked for, well that can't be true either. Any more than 3 or 4% increase per year and I wouldn't believe you, without another internet link.

P.S. I hope your LL or their agent doesn't read this forum. You might find the market review on option take up might be ~ 150% or 200% over an above what you are already paying.

How much of an increase can you business handle before you would have to leave ??

Nice Daz!

We would have loved to have bought the building we are in when the landlord offered it to us years back (consisting of my shop, and one behind me), but we were'nt in a position to. He offered it to us around 10yrs ago for $950k, then 5yrs ago for $1.2M - I would have loved nothing more than to buy it, but there was no way we would have found finance anywhere. He then sold similar shop (2 doors down) 1yr later for $1.36M. I tried to make the figures work last year to see if I could make an offer of $1.5M for mine, but I just wouldn't have been able to afford the interest and costs.

Well the LL won't be reading it, hopefully his agent isn't!

hmmmm should I be telling you how much of an increase I can afford if there may be unfriendly eyes viewing!

 

[Perp]

You must be mistaken. I've read lots of internet links and many experienced property authors and investors alike who all say that the capital gains on commercial property is nearly non-existent.

The figures you are quoting simply can't be true....surely. Can you provide an internet link so I can verify what you are saying. The weight of opinion is very much stacked against you, and some of the authors and investors are very experienced.

As to the rental returns asked for, well that can't be true either. Any more than 3 or 4% increase per year and I wouldn't believe you, without another internet link.

You are a stirrer, Dazzling!

"Those who say it cannot be done should not get in the way of those who are doing it!"

 

[Raddles]

Hi there Steve
when you exercise your option is there a market review? and who is the arbiter - is there a valuation process that has to be gone through?
Do you know any commercial valuers? who could give you a ball park?
thanks

 

[steveadl]

Raddles, yes there is a market review. The LL's agent will tell him what similar rents in the area are, and they will send me a letter saying what they want for the new lease.

Then I have the choice of either agreeing or putting a counter offer to them if I believe it to be excessive. If that were the case I would have to engage my own commercial agent to do a rent review. This is what we did about 3 lease renewals ago, and the agent we engaged did research on the area and came back to us to say the LL was asking about 50% above market. The LL's response? 'If you don't like it, leave.' We managed to get him down a bit, and have argued him down a bit in subsequent lease negotiations from what he asks - mainly because the first figure he comes in with is ridiculous (don't get me wrong - still increasing every time). This will be the first time we've done it with his agent instead of him directly.

I've already rung up a leasing manager who has a number of tenants on The Parade and they've told me they're charging between the same to 100% more than I'm paying depending on location etc. So I know I'm up for a hefty increase. But it gives me an idea of the market rate, so don't really need to get a party in to negotiate for me.

I will however be arguing with them as usual about my crappy location, and therefore expectation that I not pay full market rate.

 

[Giulio Taranto]

Hey there steve, i went through this a little while back and id just like to say "i feel your pain" it really isnt nice being on the tenant side of the fence, but hey im sure you will be fine by the end of all the to and fro.

I was a little stressed at the time of my negotiation of lease terms and increase, but got through it all just as i think you will

Good luck with it all

 

[steveadl]

Thanks for that Giulio.

Problem is on the commercial side of the fence we look at a lot more of a rise than the residential increase of $10-20pw. If only!

 

[GoAnna!]

Raddles, yes there is a market review. The LL's agent will tell him what similar rents in the area are, and they will send me a letter saying what they want for the new lease.

Then I have the choice of either agreeing or putting a counter offer to them if I believe it to be excessive. If that were the case I would have to engage my own commercial agent to do a rent review. This is what we did about 3 lease renewals ago, and the agent we engaged did research on the area and came back to us to say the LL was asking about 50% above market. The LL's response? 'If you don't like it, leave.' We managed to get him down a bit, and have argued him down a bit in subsequent lease negotiations from what he asks - mainly because the first figure he comes in with is ridiculous (don't get me wrong - still increasing every time). This will be the first time we've done it with his agent instead of him directly.

I've already rung up a leasing manager who has a number of tenants on The Parade and they've told me they're charging between the same to 100% more than I'm paying depending on location etc. So I know I'm up for a hefty increase. But it gives me an idea of the market rate, so don't really need to get a party in to negotiate for me.

I will however be arguing with them as usual about my crappy location, and therefore expectation that I not pay full market rate.

What exactly in the process in your lease if the tenant and landlord do not agree on the market rent? From my expereince if you cannot agree on who will value the rent independently then the lease will dictate who would select that valuer and the decision of that valuer would then be binding? The landlord might not have the legal right to day "stuff you go away if you don't like it" What does it say exactly in your lease?

 

[steveadl]

What exactly in the process in your lease if the tenant and landlord do not agree on the market rent? From my expereince if you cannot agree on who will value the rent independently then the lease will dictate who would select that valuer and the decision of that valuer would then be binding? The landlord might not have the legal right to day "stuff you go away if you don't like it" What does it say exactly in your lease?

Good question Anna, I honestly don't know!

My lease is at home locked up, so I must dig it out and have a look tonight. I do however know from past experience, in the end, if you can't come to an agreement he'll show you the door. Perhaps this is not legal anymore? I will see what the lease says tonight.

With past leases we have always come to an agreement. He comes in first with a very large increase, then we offer an amount that's way too low, then we meet in the middle. Problem is this used to be done between us and him directly no agents, valuers etc. I think I mentioned we did have an independent report done once which found we were paying about 50% too much, but it didn't change matters.

Even fellow LL's he knows have questioned him in the past as to why he charges so much and leaves a shop empty rather than charging a little less. He stands his ground and tells them they are'nt charging enough. Gotta admire the old guy a little bit!

I'm hoping not to need to get an independent valuer in as I have a rough idea of what rents in the area are, so will wait to see what he comes to me with.

 

[Dazz]

This is typical....



3.4. Market Review

(a) The Landlord may give notice to the Tenant at any time before the relevant Review Date of the sum the Landlord considers is the market rent for the Leased Premises at the relevant Review Date. The Landlord’s Notice may be given after the relevant Review Date and is effective from the relevant Review Date.

(b) Within fourteen (14) days after service of the Landlord’s Notice, as to which time shall be of the essence, the Tenant may serve a notice either agreeing to or disputing the sum stated in the Landlord’s Notice.

(c) If the Tenant agrees or fails to give a Tenant’s Notice within fourteen (14) days of service of the Landlord’s Notice the sum stated in the Landlord’s Notice shall be the annual Rent payable on and from the relevant Review Date.

(d) If the Tenant by the Tenant’s Notice disputes the Landlord’s estimate of the market rent then from the relevant Review Date the annual Rent payable shall be adjusted to an amount equivalent to that determined as the Market Rent of the Leased Premises by either:

(i) a person licensed under the Land Valuers Licensing Act 1978 appointed in writing by agreement between the Landlord and the Tenant not more than 21 days after the date the Tenant’s notice is served upon the Landlord; or

(ii) if the Landlord and the Tenant fail to agree on the appointment as contemplated in paragraph (i) above, then by two persons licensed under the Land Valuers Licensing Act 1978, one of whom is appointed by the Landlord and one of whom is appointed by the Tenant, such appointments to be made not more than 35 days after the date of service of the Tenant’s Notice PROVIDED THAT if either the Landlord or the Tenant fails to make its appointment in accordance with this paragraph (herein “non-appointing party”), then that party’s appointment may be made on its behalf by the President or other senior officer for the time being of the Australian Property Institute (W.A. Division) (the “President”) at the request of either the Landlord or the Tenant in which case each non-appointing party agrees to ratify and confirm any appointment made on its behalf by the President or other senior officer AND PROVIDED FURTHER THAT if the two licensed persons referred to in this paragraph cannot agree on the Market Rent for the Leased Premises, the question shall be referred to a third person licensed under the Land Valuers Licensing Act 1978 which third person shall be appointed by the President at the request of either the Landlord or the Tenant and such third person shall act as an expert.

3.5. Rent Payable Until Determination

In the event of the reviewed Rent being agreed, calculated or determined after the relevant Review Date the Tenant shall continue paying the Rent at the rate being paid immediately prior to the relevant Review Date from such date until the date upon which the reviewed Rent is agreed, calculated or determined (as the case may be) and thereafter in accordance with such agreement, calculation or determination and thereupon there shall be due to the Landlord from the Tenant as Rent payable on demand the difference (if any) between the Rent paid as aforesaid and the Rent due from the relevant Review Date applying pursuant to such agreement, calculation or determination.

3.6. Minimum Rent

Notwithstanding anything to the contrary contained or implied in this Lease the annual Rent to be payable from any Review Date shall not be less than 1.05 times the annual Rent payable immediately prior to that Review Date.



Notes :

3.6 is the "ratchet clause"....so even if the market has fallen, the minimum the Landlord is guaranteed is a 5% increase on the previous year's rent.

There is no maximum increase. The rent could jump 100% or more. Yippee if it does....obviously depends which side of the contractual fence you are standing on.

I have another Lease which is a bit better for the Landlord, whereby if the determined rent is anything ± 5% of what the landlord deemed it to be, then the full cost of all arbitration and experts time is fully to the Lessee's account.

Basically stops tenant's from arguing.....your negotiation tactic of going lowball Steve wouldn't work and it would cost you lotsa money if you were up against me. But then you're not, so that's OK.

Steve - I suggest you remove yourself from this precarious Lessee position sooner rather than later.

 

[steveadl]

Basically stops tenant's from arguing.....your negotiation tactic of going lowball Steve wouldn't work and it would cost you lotsa money if you were up against me. But then you're not, so that's OK.

Steve - I suggest you remove yourself from this precarious Lessee position sooner rather than later.

Thanks for that Daz, great stuff!

I don't think I would do the low ball offer myself. That was back in the day when it was my mum negotiating it directly with the LL. He always liked her, so made things a bit friendlier even when they were trying to gouge each other.

I believe I have a fair idea of what the market rate is, so if he comes back with what I consider a decent offer, I will most likey accept it. Fair price is all I'm after.

Couldn't agree more with removing myself from the position I'm in! Problem is, the bank wouldn't agree with me!

 

[GoAnna!]

And find that lease because deadlines are critical and you could be doing yourself real big and costly diservice. He may be bullying a larger rent than he is due.

Oh and what daz said above. Ditto

 

[steveadl]

Thanks GoAnna, will get on it tonight. Not sure what exactly it will have in it, from memory it wasn't a huge document. I'm not sure if it would specify what happens at the end of it - as it basically is the end of that lease, and just gives me an option at the end of it. Now I have to negotiate a completely new lease. But I'll find out tonight and let you know what it says tomorrow.

 

[steveadl]

Had a read through my lease. Most of it is stipulating what I can and can't do, and what is required of me - no wonder you love the commercial leases Daz!

In the lease it has:

Item 62. Extension.

The the Lessor shall upon written request of the Lessee made not later than three months before the expiration of the said term or terms and if there shall not at the time of such request be any existing breach or non-observance of any of the covenants and stipulations on the part of the Lessee hereinbefore contained at the expense of the Lessee grant to the Lessee a new Lease of the said premises for the further term or terms specificed in Part VII of the Schedule at a rent to be mutually agreed and which new Lessee shall contain the like covenants and stipulations as are herein contained excluding this option for renewal PROVIDED FURTHER that if the due observance or performance by the Lessee of the Lessee's duties and obligations hereunder shall have been guranteed by any person or firm or corporation then the execution of such guarantor of such documents or assurances as the Lessor may require for the purpose of affirming or renewing such guarantee for the said extended term shall be a condition precedent to the exercise by the Lessee of the Lessee's rights to request an extension hereunder. The extension of this Lease shall be conditional upon the rent being mutually agreed for the first year of the extended term of the lease.

That must be one of the longest sentenced in the English language! I've underlined the important parts as to negotaion of the new lease.

The Part VII referred to is a 5yr extension of lease.

It doesn't say anywhere about market valuation, or remedies for disagreement etc. Just a rent 'mutually agreed to.'

 

[Dazz]

Yes it does Steve - you just need to know exactly what it says.

The Lessor has 100% of the power given that wording.

He shall only grant you the extension to the Lease under the same T&C's that you currently have, if you ;

1. Haven't breached any of the undertakings so far
2. Agree to pay the rent he is asking
3. You pay for all his solicitor costs to draft the extension

True enough, it does say mutually agree, but given your reluctance or resistance to move, which, if he is a wily old businessman - he would be keenly aware of, then you have virtually no leverage in the negotiation whatsoever.

Knowing his history that he is quite willing to have the premises empty rather than compromise on the rent level, makes it doubly tough for you.

He probably bought the place for 60K back in '78, and it doesn't owe him anything.

 

[Raddles]

Hi there
would have to say that is quite an imprecise clause.
There is no time frame for agreement i.e. within say 1 month of the lease expiry date and there is no process if you can't reach agreement. Usually there is a dispute resolution process prescribed.
Could I suggest that when they come up with your new rent - and if you don't agree with it - you nominate your preferred amount and set up a process with an independant arbiter - something like what Daz has posted - to resolve any disagreement.
If the landlord agrees to the process - then you have something in writing which amends the above clause.
thanks

 

[steveadl]

Yeah I know I'm at his mercy Daz, always has been like that. GoAnna just had me wondering about the actual wording of the lease.

He bought the place around 50 odd years ago or so. Bought a couple others as well. At the time the council went around to all the local shop owners and asked if they wanted to buy the building they were in, would have picked it up for a song.

Good on him I say! He built the building I'm in back in 1991 (we've occupied it since construction) - just knocked up a 4m x 17m concrete block, I'd say his yields would be in the 100's of %pa range.

 

[steveadl]

Hi Raddles, thanks for the idea. I can defintiely counter offer, but in the end it comes down to him getting what he wants. If he doesn't like what I propose he can refuse - end of story.

I'm aware of what rents are generally, so a valuer couldn't tell me too much I don't know. It's just a matter of coming to a mutual agreement with the LL.

 

[steveadl]

Thought I'd post an update.

Earlier this week received the letter from LL's agent stating the new required rental would be a figure starting at 21% above current rate (and the yearly 5% increases as usual).

Yesterday I sent off a letter proposing a 10% increase instead. With previous leases we have always brought it back down to below what the last years figure was ie. if the lease started at $10 in year 1 and after yearly increases on year 5 it was $15 - the new lease generally started at around say $13 - a higher base than last time, but lower than the last year of the previous lease.

This time I know that wasn't going to happen as rents in the area have increased substantially. I do however feel that the increase of 10% is more suitable to our location when compared with rents in the main mall area.

As an idea - rent in the main mall area average around $600-800pm2 (incl GST) - with the worst locations at about $500pm2 and the best at $1,100pm2. The rent he is asking for now would put me at $647pm2 (incl GST).

We have around 10% or less of the pass by traffic the shops in the mall get, and about 1/3 of my floor space is upstairs and hardly used for business. It is mainly used for storage - if I could get rid of it I would. Regardless of how I use the space though (that's not the LL's problem) - upstairs premises would lease for significantly less, no matter what business occupied the premises. Hardly any retail premises have double story in the area, and of the bigger buildings that do - it is only leased as office space (where the current going rate is around $250pm2).

For these reasons I think a higher discount is warranted. However as I've said previously - I don't have much choice in the matter, it's up to the LL.

I now await his response....