Paying attention to detail is always important when negotiating a new lease, but even more so given the current economic outlook. Inflation may have passed its peak and the pace of growth is expected to pick up by the end of next year according to the Reserve Bank. In the meantime, global growth is forecast to remain well below its historical average while Australia’s economic activity is set to remain subdued till December as the country grapples with higher interest rates, higher living costs and falls in household wealth.
For landlords and tenants, now is the time to ensure the terms of any new lease benefit both parties and that the tenant can meet their obligations, says founder of Rethink Investing Scott O’Neill Rethink Investing | Commercial Property Buyer's Agency Australia. “A well-crafted lease agreement sets the foundation for a mutually beneficial and successful landlord-tenant relationship,” Mr O’Neill said. “It establishes the rights, responsibilities and expectations of both parties and ensures a smooth and productive tenancy.”
Before doing anything however, the first rule was to conduct comprehensive market research, either yourself or with the aid of a commercial real estate professional. “Being fully across the facts, figures and local market analysis allows a landlord to determine competitive rental rates, evaluate demand and position a property attractively to potential tenants,” Mr O’Neill said.
After this step, Mr O’Neill has 5 top tips for negotiating leases with new tenants.
1. Evaluate your location
Compare the potential of your property to others in the local area and those in similar locations. “Evaluating the rental potential of a location will help to gauge the financial viability and profitability of your investment,” Mr O’Neill said. “For industrial properties, it would be beneficial to use a 5km radius for comparable properties. For retail however, this could be on the same street or streets with similar foot or road traffic, and you could expand your search to areas in other suburbs with similar attributes.”
2. Rental rates
Be up-to-date: examine a broad spread of rents currently being charged by other landlords and for which styles of properties. “It’s important to ensure rates are competitive with other properties in the area and that they’re in line with the current market,” Mr O’Neill said. “Being aware of market competitiveness can help avoid overpricing and potentially having trouble attracting tenants. As an investor, you should understand that even small variations in exposure or aspect can make a significant difference to the rental value you can charge per square meter.”
3. Lease terms
Talk to your tenant in depth. “It’s essential to consider the length of the lease and negotiate terms that align with your and the tenants’ business goals and growth projections,” Mr O’Neill said. Depending on a tenant’s situation, they may be better suited to a short-term lease that allows for more flexibility, whereas another style of business operator could be more inclined to take on a long-term lease that delivers them stability and cost predictability.”
Mr O’Neill also advised ensuring tenants were aware of any additional terms included in the lease. “For example, some leases include clauses that allow for higher rent increases after a certain period.”
4. Security deposit
Get off on the right foot by requesting a security deposit that is both reasonable and in line with the current market, Mr O’Neill advised.
“By asking for a reasonable security deposit, you can reduce your exposure to financial risks and increase your ability to recover losses,” Mr O’Neill said. “However, you must strike a balance between protecting your investment and maintaining potential tenants’ interests.”
5. Maintenance and additional costs
Given the tricky business conditions many operators will be experiencing, Mr O’Neill said it would be prudent to make sure a tenant was aware of their responsibilities in regard to necessary repairs and/or maintenance when negotiating the lease. “It is essential to have a clear and well-defined maintenance clause,” Mr O’Neill said. “This will ensure the property is properly maintained throughout the tenancy. Negotiating maintenance terms allows you to allocate specific maintenance obligations to the tenant.
“The best possible lease you can ask for is a ‘triple net lease’ where the tenant pays for 100 per cent of the outgoings, including rental management and your land tax.”
Next week: Tips for Tenants