Renew lease on Commercial Property - 20% increase

quoll

quoll

Purchasing a business and we just got the draft of the new lease.

The previous owner was just about to sign a new lease at $49,775.88 per annum + GST, the lease the landlord has sent us is for $58,807.80 per annum + GST and he wants to up it by 3% + CPI each year after that.

This is the first draft so I guess we should have expected some haggling would be needed, but I thought we were going to take on the lease that the current tenant was going to sign.

Anyway my question is for all the commercial landlords or tenants.
Is this rediculous increase normal?
Does everyone try and get huge rent increases when new people come in?
I was thinking of countering with a $45k offer, I may as well go to the other extreme.
What is the average rent increase written into leases? CPI?

I'll go and see the accountant next week, have a chat with him.
On Monday will talk to the conveyencor and tell her the lease sucks.
I'm off to drive around the area and see what else is up for lease or sale, just checking out the options.

Cheers
quoll

 
How long is the lease and what are the options? Most commercial places stay vacant for long periods of time and landlords are scared of that. Is this property in an area with high vacancy rates? If so, find another place and offer to walk away from the deal.

I own a small retail shop, but would be happy to take a cut in rent if it meant the place was tenented. I don't evan have CPI increases because the bloody agent forgot about it, but that doesn't worry me too much.. I'll bump it up in 3 years or so... rented to a charity too.

Cheers
Pulse
 
Hi Quoll,

if you're purchasing a business, you are taking on the business, along with it's lease the way it is at the moment. I don't think the landlord can renegotiate the rental or any other terms or conditions of the lease.

I have a commercial property and my original tenant sold his business. As a landlord, all I had to do was approve the incoming purchaser with regard to his financial capacity, and sign some sort of deed of transfer.

The rental increases you mention - 3% PLUS CPI per annum??? that's extremely rich as far as I can see. Most leases will only contain market review, or a CPI or a fixed % each year, but I've never in all my years in property management seen a rent review that has both apply at the same time.

Rent increases, the frequency and the type of increase is up to the tenant and landlord to negotiate. In any long term lease, try to allow for different types of increases through out the lease, with at least one "market rent" increase around the middle of the lease.

To give you an idea, my tenant signed a 10 + 10, we have a fixed rent increase on the first anniversary, CPI increases up to the 4th anniversary, a market rent valuation on the 5th anniversary, then a combination of CPI and fixed % increases.

Also, beware of ratchett clauses in the lease (i think that's what they're called - they basically say that if a rent appraisal is less than what the current rent is, then the rent is not allowed to go down).

One more thing, get a solicitor, not a real estate agent, to do the lease if the lease is for more than 2 years.

I hope this helps.
 
I'd be wondering about the motives of the landlord. Sounds like they may not want you in the premesis.

Is the business something the landlord could easily duplicate if the premesis was vacant ?

Are there any staff members in a position where they could duplicate the business if they had the premesis? Check with the council to see if applications have been made to open businesses in the vacinity.

How much of the volume of the business would be associated with the location of the business ?

An ex employee of mine bought a business only to find that an ex employer of the business he was buying ( who had been running the business at the time the owner sold it ) opened up a competing business two doors away within one week of my ex employer taking over. Needless to say all of the clients went there and my ex employer did his dough .....

See Change
 
JoannaK said:
if you're purchasing a business, you are taking on the business, along with it's lease the way it is at the moment. I don't think the landlord can renegotiate the rental or any other terms or conditions of the lease.
Click to expand...

The current owner is only paying rent by the month, he had a lease, the lease expired, he negotiated a new lease but didn't sign it. The business was sold with a copy of the new lease attached. I thought I was going in with this lease being transfered to my company.

JoannaK said:
The rental increases you mention - 3% PLUS CPI per annum??? that's extremely rich as far as I can see.
Click to expand...

Extremely rich!!!! I was expecting CPI increases only.

The lease that showed up in the mail is for 3 years.

Come Monday I'll get stuck into the current owner, broker, conveyancer, landlord.

Thanks for the comparison.

Cheers
quoll
 
pulse said:
How long is the lease and what are the options? Most commercial places stay vacant for long periods of time and landlords are scared of that. Is this property in an area with high vacancy rates? If so, find another place and offer to walk away from the deal.

I own a small retail shop, but would be happy to take a cut in rent if it meant the place was tenented. I don't evan have CPI increases because the bloody agent forgot about it, but that doesn't worry me too much.. I'll bump it up in 3 years or so... rented to a charity too.

Cheers
Pulse
Click to expand...

There appears to be shops in the area that have been vacant for 6-12 months. I'm hoping I can reason with the landlord and make him see that having a tenant at $49k is better than not having a tenant for 12 months.

The current lease is for the next 3 years.

Cheers
quoll
 
Hi Quoll

A business with no lease has no place of business and no assessable value.

The owners / vendors of the business have just downgraded the value of their business to the balance of the period of their occupancy ie the rest of the month.

In this situation, all bets are off.

I would suggest having a specialist business broker assess the value of the business given that there is no security over the premises.

By not entering into a new lease the business owners have shot themselves squarely in the foot.

The terms and conditions of the lease are irrelevant until you can have the business itself valued.

Your position in so far as offering to lease the premises are that of a rank outsider. You have no leverage. There is no assignment of lease condition, this is a whole new situation.

In situations where the landlord and the tenant cannot agree on fair lease terms and conditions, the law makes provision for an independent valuer to be appointed and for each party to pay the valuation fees 50/50. However, this generally relates to renewal or assignment of leases. The landlord in your situation has a shop which is legally empty, even though the business physically occupies the premises.

A property law specialist, not the local agent and not the conveyancer, is the person to consult. Your conveyancer should be able to recommend someone with this expertise. When you first speak with this solicitor, ask for three examples which they have recently worked on. Solicitors each have different areas of operation - someone who is great with divorces may be very inexperienced with property and residential property differs from commercial transactions.

Do you really want this business? Then there will be a way to work through this. However, make sure that you are not legally bound to buy this business and do not pay any money (unless you already have) and as at this date, the business is practically worthless.

Tread carefully

Kristine
 
Quoll,

If you're not clear on your position in this situation, walk away.

Let the current owner chase you. His business is dropping rapidly in value.

Don't buy a lemon.

Cheers,

Aceyducey
 
From my limited experience, I understand many commercial leases are go up annually by CPI, or CPI plus 0.5-1%. And that includes Westfield.

I have never heard of CPI plus 3%. that is outrageous. And if you work it out, that 3% pa increase is a 16% increase by the 5th year. That's a big chunk of your potential growth going to the landlord.

I agree with others here that the current business owner doesn't have a business or goodwill to sell, if there is no signed lease. I'd encourage you to play hardball with both parties. Consider some of these.
- 3-6 months of no rent, based on unpredictable interruption to trade by management change. chances are the building would sit empty for three times that if you take it somewhere else.
- have air conditioners and locks renewed at expense of current parties
- owner to pay rates and electricity.
- owner to pay for maintenance on lifts, building and yards, pest control.
- owner to take on liability for storm damage.

most of this is traditionally paid by the lessee, but tmes are changing, and a smart landlord will do a lot more these days to keep a good tenant, esp if you have a high profile franchise operation. Westfield recently offered me:
- 6 months rent free for a 5+5 and CPI pa increase.
- free air con
- no contribution to lift maintenance.


don't let them give you the spin that they must get a reasonable return based on today's valuation. Let them try and sell it at that valuation without a tenant!
 
Yep........they have got a problem haven't they :D

From my experience, in NSW when a business is sold, the landlord has the right to accept or veto the buyer, much as they would with a completely new tenant. They may decide to transfer the lease or sublet to the new buyer with a written agreement for the option period.Quite often a completely new lease is written and the old one becomes superceded.

However, in your circumstances I would be saying to the vendor that I won't buy it without an acceptable lease being available to me. Let him then go to the landlord and argue his case. I guess he can say that if no acceptable lease is made available to you then he will move the business, get a lease and then sell.

Commercial leases I have been involved in, usually are annual CPI adjustments, with a ratchet clause ( no decreases) the other method is an agreed percentage per annum. I strongly urge you to avoid the fixed amount percentage type as over a 5 year period they can get VERY nasty. All of us here know how compound works......you are on the wrong side of it.

I don't think I would like to be the new kid on the block and then be moving the business, but it would depend on the business I guess.

Be prepared to walk away, the landlord is being unreasonable and he won't get any friendlier once you sign a lease.
 
Thanks guys.

It's so much fun steping into a new area, so much to learn.

Anyone know a good commercial property lawyer in Adelaide? I might need to talk to one.

The landlord has accepted us as tenants, it's just the terms of the lease that need sorting out.

The blurb you get from the broker stated the current owner had a lease that commenced July 1 2004, this should give me some legal recall.

Definately need to get the CPI increase as the only increase, get rid of the 3%.

Wonder how much I can get the vendor to drop the price with the lease crap?

Thanks Kristine, Aceyducey, thefirstbruce, Macca, JoannaK, see_change, pulse, for the assistance, your comments have helped heaps.

I'm still enjoying this game.:D
Cheers
quoll
 
One more comment to add to the others.

If you are borrowing to buy a business, a bank loan may well be P&I only for the term of a lease. I was looking to buy a business a while back where the lease was 3 years- and paying back P&I with a three year term would have been very painful.
 
Thanks Geoff

Got out of that one, borrowed against residential property, with an interest only loan. The lease is the only purchasing hassle.

Once we are in the business we have to build it back up as it's been run down alot.

Cheers
quoll
 
G'day Marc1

It's a video store. Rental and Retail of DVD's, Games, Music.
There are at least 50 for sale around Oz currently.

Buying the wife a job and getting a managed business with 6 staff. It'll give us something to do in the evenings, talk and buy DVD's.

Just keep an eye on the for sale ads and see what shows up that is profitable.

Had a look at automotive but the wife wasn't interested, some of the franchise tyre and service centres make great cash, well worth the investment.

Also looked at food, but wasn't that comfortable.
Looked at furniture but the good stuff was sold.
Equipment hire looked good, also saw a really good cleaning place, about 12 staff and some contractors, making good money but wanted about $400k.

Cheers
quoll
 
Last edited:
Some good advice already,

In buying a business you are buying goodwill which is intrinsically relaed to the lease.

If the landlord cancels the lease (ie if the lease termiates) then the goodwill is worth almost zero.

I would put it on to the vendor to get the lease in place before I bought the business.

just my thoughts,

chees,
RightValue
 
Hey Quoll,

Notice that the business is a video store, used to have one of them a few years ago. :D

How do you think the current launch of DVD by mail will effect the industry??

Also, the imminent , large scale launch of movies on demand via digital pay TV may also have an effect...........any thoughts??

Some places in NSW the value of video stores have fallen DRAMATICALLY over recent times. :eek: :eek:
 
G'day Macca

Like a lot of industries things change. I worried about the piracy, cable TV, video on demand, but in the end I decided a lot of loanly people want to go and have a chat with someone, the numbers looked good.

The DVD by mail thing seems OK but you still have to go and post the disks back to the sender. I'm hoping that a friendly store can give a bit more service, there is a flat fee service $29.95 month, you get 4 DVD's at one time and can swap when ever you want, 1 premium new release, 1 new release and 2 weekly, late fees and such still apply but if you don't mind stopping at shop each day you can have a new movie each and every day.

There's also talk of hosting points of presence or doing internet cafe type things. Seems like a lot of room for growing the business. Will give it a go for a few years at least.

cheers
quoll
 
Hi Quoll

Good to see you looking at business in addition to property. I am of the same mind currently.

Re video shops, a few points:

1.
a mate of mine is looking at a video ezy location in Qld. We have talked a lot about the pros and cons of video shops at the moment. We agree they have taken a pounding in the last ten years. However, he feels a lot of that is due to competition. In our suburb, there is around 5 shops. So that decreases store turnover. Recently, the store with the owner with the deepest pockets has started a price war. He has dropped the price of new releases to $2.60. THis is obviously to win back market share and exhaust competitors' funds, and drive them out of business. Free market economics in its purest form. So beware the competitor with deep pockets.

2.
we both feel a recession is on its way, due to high consumer debt putting the squeeze on consumption, in addition to increased fuel prices and many people taking on large mortgages. Now, how a recession will effect video store hire, is debatable. My mate feels the first thing that goes when money is tight, is cable tv. The second thing is going out to the cinema. Which is all good news for video rentals over the next few years....


BTW, I have never worked out why video shops don't diversify their income streams. From what I understand, Tuesday and the weekends are when you do most of your trade.... That leaves a lot of dead time to exploit.

Wouldn't it be a good little earner to have gaming machines in store, so your gamers could get addicted to the latest and greatest games, then rent or buy them? you could go all out, and get a fast networked gaming room in. These are big news in the USA and South Korea. Some of the stores in Qld seem to be subletting space to Dominos Pizza or similar takeaways....
 
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