Advice on whether to buy or lease commercial property in Australia
This article is a guide for both landlords and tenants. The tips for landlords are further down this page. Click here to access them now.
While specific Acts and regulations relevant to the different Australian states will induce document drafters to insert specific clauses and provisions into a lease document, the tips in this article apply Australia wide.
Why is it so important?
After salaries, the cost of your business lease is likely to be the biggest overhead you have. Because a business lease invariably involves a commitment for a substantial period of time, it is very, very important to get the right premises on the right terms.
Here are a few tips:
- Write down absolutely all the features you need in your new premises. Put them in order of importance. Check every property you visit against your list, and make sure you account for any additional cost or disadvantage which each may present;
- Short leases are often called tenancy agreements, but there is no difference in law. You can fix your deal for any period you like. If your landlord likes the thought of your becoming a tenant he will ask for a long term. If you do not wish to be tied then you will negotiate a short term. Start with the deal that you would like, not the one that is presented to you;
- Business property tenants have less statutory protection than residential tenants. (but see below). Most commercial landlords are either professional landlords or use professional agents, or both. They are experts in every aspect of commercial property. Be prepared for a strong sell;
- The main effect of the comparatively free market in commercial property is that "everything is up for grabs". If the agent or landlord thinks you are likely to take the property on offer it is unlikely that they will move on the terms. If you make it clear that you have several alternatives, then you will find that the previously "fixed" terms suddenly become very flexible. Much depends on the economic cycle;
- If the market in the sort of property you want is poor at the time you are searching, then you should make sure that there is some sort of a ceiling on the new rent when it is reviewed. You do not want to find you are paying three times as much in three years time;
- Business property leases for longer than three years generally incorporate a provision for the rent to be "reviewed", usually annually. The review is usually "upwards only". Infrequent reviews obviously lead to your total payment being less over the term of the lease;
- Commercial agents will usually entice you into a deal by setting out only half of the terms which are important to you. Once you have agreed on that basis your solicitor will receive a draft lease document, which gives all of the bad news. By now you are psychologically and practically committed to the property, and you may find your solicitor's concern to be an irritation. Because you think the deal has been done, you think "the legals" are a formality;
- Avoid this trap by making sure your deal with the agent or landlord covers all of the terms that will affect you. If they do not know the answers, ask them to find out and tell you quickly. Get it in writing - you are not paying them, but you are paying your solicitor to negotiate. This also saves wasting solicitor's fees if you later decide to withdraw from the deal. You can use a Net Lawman lease document as a model version. The commentary will help you set up your shortlist and tell you what to expect;
- If you take a lease of part of a building, such as a shop in a parade, you will find that some of the terms in the lease may be included for equality and fairness among the tenants;
- Some landlords run a multi-let building or estate on the basis of a "standard" business lease, because they have made special arrangements with a lender to maintain the lender's security by insisting that all units are let on terms which ultimately benefit the lender if the landlord goes bust. Such a lease is often referred to as of "institutional quality". A cynic might say it is the opposite of "tenant quality". A further reason for inflexibility is that the commercial agent now trying to sell you the lease, also "manages" rent collection and repairs and maintenance. They therefore have a strong interest in all the lease obligations being the same, since their job of managing would be more complicated if every tenant had different obligations and rights. One of your questions to the agent at the outset should therefore be as to the flexibility of the lease. If there is no flexibility you should look particularly carefully at the obligations you are being asked to sign;
- Whether you are looking at new built space or not, always use an experienced commercial valuer. He / she will help with;
- Rental valuation;
- Negotiating the terms you really want;
- Advising you as to what is or is not possible;
- Preparing a schedule of dilapidations;
- Instruct your surveyor precisely, having negotiated a fixed price. Decide where you want the help and pay only for those services. But beware! Your surveyor too may be reluctant to get involved in the detail he would usually leave to solicitors;
- Despite the forgoing, do not assume that your landlord is trying to take unfair advantage. There may be concessions you can make to the landlord in exchange for concessions that he can make to you. Do not assume that every aspect of the negotiation is contained in the lease;
- Finally, remember that in all matters relating to commercial property, the only rule is "there are no rules". You are simply in a commercial negotiating position.
Your first consideration is as to the relative importance of rent, as against capital growth:
- Of course everyone knows that the market allocates a higher return to property types and locations where the perception of risk is greater. Factors include;
- The chance of tenant default;
- Ease of re-letting if tenant defaults, and time taken to find
- new tenant;
- Value of property;
- Perception of increase in rental value, which will feed into a;
- higher capital value;
- Acceptability as security for a loan;
- Extent of regular management work;
- Cost of repairs and other expenses;
- It follows that a multi-let industrial building in poor condition in a run down industrial area may provide a rent yield of 15% - 20%, whereas a shop on Oxford Street, Sydney may yield only 3%. Of course, the market tends to be risk averse, so you may find that the multi-let building gives you twice or more the net return on the shop;
- Negotiate personally, or use an agent you can talk to – it saves time and money. For all but the very smallest transactions, you are well advised to use the services of a commercial agent. But if the rent is low, you cannot expect him / her to be trotting out to your distant building every five minutes to see prospect after prospect. For low cost transactions the best person to negotiate the deal is you, the landlord. If your tenant wants an “up-and-over” door or a different shop front, you can arrange the terms, the time and the rent immediately. If it goes through agents, you have lost another month’s rent;
- For most transactions, use a commercial agent as an adviser, even if he / she does not show the property. The advice is usually worth far more than the cost;
- Start with the terms you want to be included. You might like to use a Net Lawman lease document as a template and aide memoir at an early stage, so that you can be sure to ask your tenant the right questions. The advantage of this is that you may be able to avoid tying up the transaction with solicitors for months while you are receiving no rent. It is far better to negotiate the controversial terms yourself than to leave it to your solicitors to bat draft after draft to and fro. Furthermore, if your new tenant can tell his solicitor that he knows all about whatever points the solicitor raises, the solicitor will be less inclined to be seeking out points to score;
- When you have negotiated a deal, make sure all the points you have agreed go out to the other side. Otherwise you will find that one or other of the solicitors is “re-inventing the wheel”;
- Put the property into good repair. It is likely to be cheaper for you do so than for your tenant. The property will look better when offered, so will let more easily. You will start from a sound position, so the tenant will have to maintain in better condition. You will not be in breach of any borrowing covenant. Your property will have a greater value. Obvious really;
- If you want to maximise the value of your property as security for borrowing, make sure your solicitor is aware of this and is a commercial law expert. Small changes to the words of the lease may make a big difference;
- If your property is multi-let or the units have common services of any sort, do make sure all the lease provisions are the same. You will create a nightmare if each tenant is allowed to negotiate different terms. Make sure the total obligations add up to 100% of the total cost. This requires separate consideration of each item of expenditure. When you come to offer units to let, you will find acceptance of your “standard” lease if you have considered the tenant’s likely reaction. If your solicitor thinks he is doing you a favour by producing a standard draconian draft, put him right. You want good tenants who pay your rent, not a reputation for machismo and a half empty building;
- Business property leases for longer than three years generally incorporate a provision for the rent to be "reviewed" annually. The review is usually "upwards only". Infrequent reviews obviously lead to your total payment being less over the term of the lease;
- Always obtain two guarantors for a limited company or one for a new sole trader. Many people operate their business on the basis that if it goes down that is no problem because anything of value is already in the name of wife, husband or mother. The safest guarantors are those most distant from your tenant, so try to avoid spouses and children.
Please note that the information provided on this page:
- Does not provide a complete or authoritative statement of the law;
- Does not constitute legal advice by Net Lawman;
- Does not create a contractual relationship;
- Does not form part of any other advice, whether paid or free.
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