Companies news

Tenant CS shares tips on Handling an Upcoming Commercial Lease Expiry

Navigating a commercial lease expiration requires careful planning to avoid unexpected costs and challenges.

A commercial lease expiry can creep up on a tenant and be costly without the proper preparation and advice. So in case of an impending expiry of lease, Tenant CS shares four tips to get the best results.

 

1. Start early

This is the most valuable piece of advice Tenant CS can give their clients. Timing is an essential part of any renegotiation or relocation project because:

 

It provides a tenant with leverage

‍Impending deadlines can be used against an unprepared tenant because of the urgency they create. Landlords also tend to become more flexible as negotiations progress. So, entering talks with plenty of time up their sleeve gives a tenant the leverage they need to negotiate a better deal and means they are not entering negotiations with their back against the wall.

 

It allows breathing space

Timing is also crucial to have the breathing space needed for a tenant to conduct their workplace strategy and understand their property requirements before sourcing relocation options or renegotiating with their landlord. It also gives the ability to engage in a stay vs. go process to make well-informed decisions and create a level of ‘market tension’.

 

Without a lease option in place, the landlord does not have to renew

A tenant needs to find another space to move into - and fast! It becomes difficult if their business goodwill (e.g. customer base, employees, fit-out, machinery) is attached to their current premises. Starting the process early on helps protect this goodwill because they will have time to communicate with their customers and find a comparable space in a suitable location.

 

When it comes to renewals, time is a friend

‍If the leasing agreement does not contain an option, a tenant has no automatic right to renew their lease. Assuming both parties are happy to renew, they will have to negotiate to establish the new lease terms. So, if the landlord knows their tenant is running out of time, they will have the upper hand at the negotiating table.

 

A holdover is an uncertain fate

If a fixed-term lease expires, the landlord may agree to let the tenant stay in the premises on "holdover" or "overholding" month-by-month. But this option can be risky as the notice period is usually only one month (in some cases, it can be as little as seven days!). Moreover, the landlord is not required to provide a reason for termination - so a tenant could be out very quickly if their landlord secures another new tenant.

 

Exercising an option requires notice

If there is an option to renew under the lease agreement, it usually requires a notice period of between 6-to-12 months. Most commercial tenants will also be obliged to provide written notice of their intention to exercise their option. The closer they get to their expiry date, the less likely they will negotiate effectively or find alternative space.

 

In a tight market, more time allows for more options

Though the balance has shifted in favour of the commercial tenants, industrial tenants face tighter market conditions. So, an industrial tenant that does not leave themselves enough time may be left with no market options and no leverage to negotiate optimal renewal terms.

 

How much time do tenants need to allow?

Calculating the time needed to secure a great space and deal is not an exact science. It comes down to the market, the size of the tenant’s business, their internal objectives and projected future growth. Tenant CS recommends starting within the following time frames:

 

project timing outline in the lead-up to commercial lease expiry:

  • 24+ months for projects over 5,000sqm
  • 18-24 months for projects between 2,000-5,000sqm
  • 12-18 months for projects between 1,000-2,000 sqm
  • 12 months for projects between 500-1,000 sqm and 6-9 months for projects under 500 sqm.

 

project timing in the lead-up to industrial lease expiry.

  • 15-24 months for projects over 5,000 sqm
  • 12-15 months for projects between 1,000-5,000 sqm
  • + months for projects under 1,000 sqm.

 

Tenant CS advises their clients to prepare as early as possible. As a rule of thumb, they recommend leaving at least one year to explore the market and decide whether it's best to stay put or relocate. However, larger occupiers, particularly industrial tenants and mid-to-large global companies with lengthy approval processes, are encouraged to start at least two years before lease expiry.

 

Is having time up your sleeve still valuable in a tenant market?

In the current market, commercial tenants are in the driving seat, and plenty of great options are available. So, if a tenant does not get the terms they are looking for, they should not be afraid to say no and walk away. If they have left themselves enough time, there's sure to be another suitable option out there. Commercial landlords will also go to lengths to retain high-quality sitting tenants. So, they may come around to the tenant’s terms. Unfortunately, the same does not apply to industrial tenants. Across Australia, the industrial vacancy rate has hit record lows. However, even in a tight market, industrial tenants still have options. And having time up their sleeve is the key to securing a good deal as it:

  • Supplies the tenant with breathing space to understand their requirements and negotiate effectively
  • Presents the tenant with room to consider upcoming lease expiries, greenfield sites and built-to-suit options
  • Allows the tenant to make a plan of attack and implement strategic decisions that create opportunity

 

2. Be prepared

If a tenant is looking to renegotiate their existing lease, they should plan well in advance and gather all the relevant information, including their:

  • Lease contract
  • Annexures (if applicable)
  • Recent rent statements
  • Property condition report

 

3. Analyse the situation and remain opportunistic

To stay or to go? The answer is not black and white. A tenant should carefully consider whether it would be better to renegotiate their lease or relocate to a new space. These days, unless they already have a tenant-friendly lease, Tenant CS often advises their commercial clients not to exercise their options and instead go to an open market. In any case, to aid the decision, a tenant should be sure to:

 

Explore the market

Is there a suitable space to move into? How would the new lease compare to the existing lease? No building is the same. Rent, vacancy rates and incentives will vary, depending on the building, location and landlord. A tenant should do the research.

 

Consider the business plans

How will these impact a tenant’s current and future space requirements? Will their existing space be able to accommodate planned business changes, or does it make more sense to move now?

 

Analyse the real cost of relocation

This is arguably the most important tip of all. The rental rate might be lower in another space, but the grass is not always greener on the other side. A tenant needs to think about the additional costs that come with relocation. For instance, IT/fit-out costs, 'make good' costs, moving costs and the potential impact the move might have on staff and customers. Recognising that a higher rent is sometimes justifiable if the premises adequately serve a business's current and future needs is crucial.

 

Stay opportunity-driven

If an industrial tenant is battling a tight market, they should comb through all market options, even if these options do not align with their upcoming lease expiry. Then, make strategic decisions that create future opportunities, like renewing at their current premises and negotiating the ability to assign or sublease their space. This way, they can keep searching for their dream premises without the pressure of lease expiry.

 

4. Appoint a tenant advisor

A tenant can assign a commercial tenant advisor to do the legwork. In Tenant CS’s experience, tenants who negotiate their lease pay an average of 22% higher rent over the lease's term. So, it pays to partner with a professional. For a commercial tenant, these are unprecedented times and anything is negotiable. And for an industrial tenant facing a tight market, creating competition for their tenancy becomes the great equaliser in negotiations. Tenant reps help build this competition simply by showing up.


Source: Tenants CS

Share this page Share on FacebookShare on TwitterShare on Linkedin
Close

Stay informed

Subscribe to our newsletter!

Close

Join our network