When I was putting my thoughts together for this article I thought it would be interesting, and possibly useful, to ask ChatGPT for input. My first query was, “Do commercial leases in Australia favour the landlord and not the tenant”. Here is an extract from the ChatGPT response, “In Australia, commercial leases generally favour landlords over tenants, although the level of imbalance varies depending on the jurisdiction, the nature of the property, and the specific terms negotiated in the lease.” Thereafter, ChatGPT listed reasons why commercial leases favour landlords. The reasons included landlord leasing expertise, landlord origination of the lease agreement, tenants having less access to key information, and tenant fragmentation versus landlord consolidation. ChatGPT concluded that “While tenants do have some rights, particularly under retail tenancy laws, commercial lease agreements in Australia often favour landlords due to standard terms that protect landlords’ financial interests and control over the property.”
Chat GPT, drawing on the vast resources found in the internet library, confirmed what we at LPC know from 30 years of advising and representing commercial occupiers across Australia and New Zealand, that tenants start negotiating from the outside lane. The odds are stacked in favour of the landlord, and it is no easy task for a tenant to derisk a lease arrangement.
Recognising the negotiating challenge is a solid starting point for improving one’s lane position, but lease terms that favour the landlord are embedded in norms finding their way into most lease agreements and that sets the scene for lease negotiations. Improving the tenant’s lane position and lease outcomes requires well formulated strategy and tactics. I thought ChatGPT may have something to say about this challenge and it did, highlighting that a tenant can “achieve more leverage in lease negotiations by taking proactive steps to understand the market, prepare well, and negotiate strategically.” With a little coaching, ChatGPT suggested what an individual tenant can do to gain more leverage for a specific lease negotiation, and commented on what tenants can do together to influence generally accepted lease norms so that these are more supportive of the tenant. At this point of the digital conversation, it became apparent that we had insights and expertise that ChatGPT was silent on, and the conversation came to an end.
In relation to individual tenants and their lease negotiations, starting with the end in mind is vital for improving a tenant’s lane position as this focuses the lease negotiation in the right direction. It is all too common that tenants do not pay enough attention to defining their long-term accommodation strategy having regard to their business strategy, outlook, and risks, and this omission results in lease commitments that have undue and avoidable risks relating to location, premises, and lease terms. Thereafter, key foci for ongoing improvement in the tenant’s negotiating lane position include getting going early, getting a conflict-free advisor on board, discovery of real data pertaining to the real estate market and current lease arrangements, generating viable alternatives, following a structured lease negotiation process, quantitative and qualitative assessment, and paying attention to the detail. These foci will increase the tenant’s negotiating leverage.
At LPC we recognise that the opportunity to shift lease norms to be more supportive of the tenant has yet to be grasped, and that the essence of this opportunity is for tenants to increase the tenant voice via education, coopetition, collaboration, and association aimed at overcoming the disadvantages of tenant fragmentation and limited negotiation leverage. From an education perspective, the need is for a step-change in public domain narrative about leasing from the tenant perspective together with a substantial increase in the number of tenant perspective training events that equip participants to achieve more tenant-friendly lease arrangements. At LPC, our strategy is to collaborate with associations, franchisors, trade councils, chambers, and multi-site commercial occupiers to make our expertise, and our digital platform, more accessible to more tenants, thereby increasing awareness of the need to shift lease norms together whilst equipping tenants to negotiate more effectively.
In conclusion, long-standing lease norms favour landlords by protecting passive and risk-free income. The largely unrecognised, and unrealised, opportunity is for commercial tenants to intentionally and collaboratively pursue changes in lease norms that increase lease productivity. At the end of the day, it is the business that takes place inside the leased premises that makes the economy work better, and lease norms that are more supportive of tenant enterprise will benefit all stakeholders in the long-term.
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