“Bad actors only get off the stage when the stage is burning.” - Anonymous
The dust has now settled on the ‘by invitation only’ 2025 Economic Reform Roundtable, which was led by the Treasurer and held at Parliament House in Canberra from 19 to 21 August. While there was consensus on Australia's low productivity problem, opinions on its causes and solutions differed in emphasis. Many zeroed in on the need for tax reform, others on the dominance of a few powerful firms, while still others focused on the labour productivity challenge. Some drew attention to the productivity limitations that arise from over-reliance on commodities and ever-rising real estate prices.
The jury is out as to the impact of the forum on ‘making our economy more productive’. A notable omission from the forum foci was consideration of the impact of long-standing commercial lease norms on lessee productivity.
Why should we pay attention to commercial lease productivity?
“Learn from the mistakes of others. You can’t live long enough to make them all yourself.” - Eleanor Roosevelt
The pandemic left many commercial lessees with enduring lease obligations but with impaired utilisation of their leased premises. From a productivity perspective, this situation resulted in escalating occupancy costs, along with diminished utility and reduced income for most retailers. Yes, lease productivity does matter for commercial tenants who create and execute the business activities that drive an economy. For instance, the misalignment of input occupancy costs and business outputs is a productivity problem that harms both the enterprise and the broader economy. In far too many cases, the harm caused becomes terminal as the business ceases to operate.
Certain sectors, such as the hospitality sector, were hardest hit during and after the pandemic, as rentals escalated and the addition of deferred rentals made recovery particularly difficult, especially as consumer discretionary expenditure tightened and demand decreased. Regrettably, unsustainable Occupancy Cost Ratios contributed to the rapid increase in hospitality operator insolvencies, underpinned by inflexible lease arrangements designed to ensure commercial property investors achieve passive, escalating, and risk-free returns on their investment. With the hospitality business failure rate approaching 10% there is clearly a productivity issue that cannot be ignored for closures mean the loss of enterprises and entrepreneurial activity, with long-term damage to the economy.
While business closures capture our attention and prompt a focus on productivity, considering a scenario where more flexible lease arrangements are the norm is a positive exercise that raises awareness of the transformative opportunities that would arise from increased lease productivity. For example, consider the impact on the hospitality sector if the standard lease arrangement for this sector were to tie rental to income. Would this variable cost arrangement not lead to a greater alignment between the lessor and the lessee, with both parties benefiting from increased income? Would this envisaged norm motivate the lessor to ensure the appeal of the leased premises for the lessee’s customers is continually enhanced during the lease term? From the operator's perspective, would the arrangement alleviate the cash flow strain associated with low and peak seasons, allowing for sustained attention to business improvement?
While this singular hospitality sector example illustrates the need to give lease productivity more airtime, there is much more to be said. We will elaborate on this further in future articles.
Why does commercial lease productivity get so little attention?
"The reasonable man adapts himself to the world: the unreasonable one persists in trying to adapt the world to himself. Therefore, all progress depends on the unreasonable man." - George Bernard Shaw
Many years ago, one of our advisors was asked to advise and represent a solicitor who had moved on from a career in property law where he acted for various landlords, to becoming a business owner. We were entrusted with securing office premises and a lease arrangement aligned to the business outlook. In the negotiation process, we shared a heads of agreement with our client that included various tenant-friendly provisions, such as a make-good provision that required little more than making the space tidy and handing back the keys. Our client questioned the make good provision, suggesting it was not possible to have such a provision. His query regarding the tenant-friendly make-good provision was influenced by the multiple times he had acted for landlords. However, in his new role as a business owner who would utilise leased premises, he was very pleased when we assured him that this was a negotiated outcome agreed to by the lessor. This anecdote illustrates how property investors, their solicitors, and leasing agents have successfully perpetuated lease arrangements that are highly protective of the lessor's interests and are regarded as normative and non-negotiable.
Perhaps the most compelling evidence of the consolidated power and influence of well-organised commercial property investors on the public domain narrative and generally accepted lease norms is the use of the word ‘positive’ when describing the outlook for commercial property. ‘Positive’ means tight vacancies and an increase in commercial property valuations. The fact is that this situation is anything but positive for the commercial occupier whose negotiating leverage is diminished.
Why should commercial lease productivity get more attention?
It is interesting to ask Chat GPT or Copilot what Australian productivity commissioners focus on in their productivity reports and recommendations, for lease productivity does not feature. Surely this is a glaring omission when one considers that there are over 2.5 million small businesses in Australia (ABS), and it is estimated that 60-70% of these businesses are lessees. What opportunity is being lost by not giving lease productivity more attention? What entrepreneurial effort is being stifled by outdated lease norms that misalign lessor and lessee interests? It is in the interests of commercial tenants to follow George Bernard Shaw’s advice and to collectively become ‘unreasonable’, rejecting the long-standing narrative and the lease norms that impair enterprise productivity.
Who is LPC, and how do we help futureproof their accommodation arrangements?
LPC is a conflict-free advisor to commercial tenants across Australia and New Zealand. We facilitate a strategic review of accommodation strategies, represent occupiers to secure the best-fit accommodation arrangements, provide lease management services to multi-site occupiers, and oversee fit-out and relocation for clients. Contact us to help with your accommodation requirements.
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