At this time of the year, and as we emerge into a changed business environment post-pandemic, we at LPC are focusing on the theme of “Reset” in our tenant advisory work with our clients. It is an appropriate time to take stock, and to reset your property strategy in order to future-proof your business. As a tenant taking office space - or renegotiating current space - you may find some concessions that are beneficial to the business.

“The pandemic has brought about higher office vacancy rates and more landlord uncertainty, especially in city business centres. This is providing tenants with the opportunity to reset their property strategy and leases, as landlords are more open to giving concessions”, says Julian Kurath, Director LPC

The changing work environment, in particular the increase and potential permanency of a workforce working from home, has resulted in changing office space needs. Landlords, who rely on full occupancy to get returns on their investments, are also forced to relook their strategy and make leases more attractive to tenants. 

Opportunities for negotiation

Reduced rent

Typically, the main reason that a landlord will provide a rent-free  (or abatement) period is as an incentive to attract commercial tenants. In some cases, landlords will offer a rent-free period as an incentive to cover any repair or alteration costs that you as a tenant would otherwise need to pay.  (We delve deeper into rent abatements here [link to article])

Security and bonds

A security deposit or bond is paid when a tenant signs the lease. The landlord holds it for the term of your lease, returning it at the end as long as the property remains in good condition.  In some instances this is paid to the landlord in cash. It could also be in the form of a bank guarantee or bond insurance (popular in the US and now becoming more acceptable in Australia). A good negotiation for reduction, or a different form of security, could save upfront cash payments and prevent negative working capital impacts for the tenant. 

Lease term

To get leverage with a landlord, a tenant might negotiate a longer lease - this would likely increase your incentives such as fit outs, rental rebates, abatements. The landlord will be more amenable to a longer term if he is holding his property for pure investment purposes. Conversely, some landlords may negotiate shorter lease terms if those are desired by the tenant, particularly if there is the desire to develop the property in the future and not be tied in by tenant constraints. 

Signage

Building signage is one of the most sought-after concessions in office leasing. Tenants will often offer to pay a “marketing fee” for the privilege of having their signage on the building - negotiating this as a concession can be valuable for company image and branding, especially in a location where there may be many competitors. 

Lease escalation

Escalation clauses are a standard feature in commercial real estate leases. Such clauses give the landlord the right to increase your rent at certain points within the lease. For example, your rent may increase after a set time or when certain events occur, such as the expiration of an economic improvement period or completion of certain capital improvements by the landlord.  Reduction in the amount or percentage of the escalation is a potential point of negotiation, future proofing your lease today.

Improvements and fitouts

Most office buildings will not be ready to move into at the start of a lease. Tenants will likely need to customise the space to meet their needs, which can be both a lot of work and an expense. A tenant improvement allowance (TIA) is a concession that can be made by a landlord to make a lease more favourable. The TIA is the total amount of money that the landlord will put towards building out the space for a tenant. It can be negotiated as a lump sum or on a per-square-foot basis. 

“Understanding your intended office layout, fit-out requirements and amenities are important before entering such a negotiation,“ says Director of Project Services at LPC, Rebecca Pelling. 

In closing: We encourage any tenant considering a move or renegotiation of an existing lease to ensure that they thoroughly understand all the implications and potential opportunities. Working with a specialist tenant representative such as LPC will ensure independent, tenant-focused advice.
 

Why LPC?

At LPC, we partner with tenants and occupiers across Australia and New Zealand to optimise their office, industrial and retail property portfolios providing an integrated suite of services including transaction management, portfolio and lease management and project management.  We provide conflict-free advice and representation, meaning we have no ties with owner-developers or landlords. Tenants and occupiers interests remain at the core of what we do as we negotiate on your behalf and endeavour to rebalance the scales in a market which favours landlords.

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