LPC provides office, retail, and industrial occupiers with leasing advice and services that make a difference to their respective businesses. The pandemic has created unprecedented challenges for occupiers as lease commitments continued despite interrupted usage of the leased premises.  In this article Ken Lam and Ed Andrews from the LPC team share their insights into the less obvious opportunities that the pandemic has created to improve one’s lease arrangements and one’s business.

Now is the time!

It may well be that your lease has a way to go before lease expiry (which is the typical trigger for reviewing one’s tenancy requirements) which begs the question why ‘now is the time’?
The first part of our answer is that the pandemic impacts forced landlords and tenants to consider interim lease arrangements that differ from the terms in the executed lease.  This created a situation where many tenants and landlords renegotiated lease terms prior to lease expiry.  From the tenant perspective this opportunity to renegotiate lease terms should not be missed, for this opportunity will be ‘here today and gone tomorrow’ as normality returns.  This is the first reason why ‘now is the time’.

The second part of our answer relates to the commercial real estate uncertainties fuelled by the pandemic, and the fact that uncertainty creates opportunities for parties who act with foresight and good judgement.   The uncertainties relate to the great many office and retail occupiers who are rethinking and resetting their accommodation requirements, and the potential impacts on future supply and demand for these spaces in CBD and suburban areas.  The unknown is unsettling for both landlords and tenants and this is where the opportunity lies for tenants.

At LPC we are encouraging our clients to make the most of the current opportunity.  We facilitate a review of the business requirements into the future, and then a review of accommodation needs having regard to future business needs, and trends that impact real estate values and workplace productivity.  Although the pandemic has accelerated the remote working trend and the increased adoption of technology in both office and retail businesses, the truth is that these trends have been around for a long time.   Furthermore, the realities of rapid urban population growth of our major cities, ever increasing commuter times, and the ever-increasing cost of prime office and retail space are nothing new.  With accelerated adoption of by office tenants of a hybrid working model that includes remote working, it can be expected that demand for CDB commercial space will decrease with increased demand for commercial real estate situated in regional areas and in the suburban or strip commercial locations in our major cities.   At LPC we anticipate that the increased demand for non-CBD commercial space will continue to increase and that this will increase landlord leverage in the years to come.  We are therefore encouraging occupiers of commercial space outside the CBD to leverage the current uncertainties linked to the pandemic, and to renegotiate key terms that reduce business risk into the future.  Similarly, we are encouraging renegotiation of CBD tenancy arrangements to leverage the uncertainties relating to effective rentals into the future. ‘Now is the time’. 

To renegotiate!

If ‘now is the time to renegotiate’ then the question is ‘what to renegotiate’?  
Many occupiers end up in trouble because not enough attention is given to less obvious commercial terms when their lease was initially negotiated.  The best example of this is that very few tenants have utilisation protections in their lease terms, and this omission continues to cause business hardship for many during the pandemic related lockdowns.  The omission leaves tenants exposed, with limited utilisation of the premises but with continuing lease obligations.  Rental relief has been difficult to achieve and has been dependent on the landlord’s willingness to renegotiate, and on government assistance and changes to legislation.

Thinking through potential business and tenancy risks leads one to renegotiate lease terms that trigger rent reduction in the circumstance of not being able to utilise leased.  At LPC we have a maxim that says, ‘business before space’.  Our advisers are helping clients review their business objectives and risks going forward, and to translate these into accommodation arrangements that best support their business into the future.  More importantly we assist with the hard yards of renegotiating lease arrangements that de-risk the business. 

The question is what are we focusing on to improve our client’s lease arrangements? Our efforts are directed at achieving improvements from the tenant’s perspective in relation to cost, risk, flexibility, obligations and guarantees.  As always, the ‘devil is in the detail’.  The items that we give detailed attention to include the valuation terms that govern the rental if an ‘option to renew’ is exercised, the obligations of the landlord relating to matters that make the premises work for the tenant, the ability to exit or to contract or to expand the tenancy, and the tenant rights related to usage and modification of the premises.  

In summary, our negotiations are underpinned by the concept that a tenant is ‘buying utilisation’ of the premises via the lease.  In this regard we seek landlord guarantees that the attributes that made the premises the preferred choice initially will be sustained, and we seek provisions that amend the occupancy cost when utilisation is impaired for reasons beyond the tenant’s control.   

Your lease arrangements!

The question is how your lease can be improved upon to better support your business now and into the future?  We recommend that you:
1.    Think through your business objectives going forward
2.    Undertake a detailed review of your lease
3.    Highlight commercial terms that could be more tenant friendly
4.    Develop and implement a renegotiation plan    

You will find the LPC subscription service will help you identify terms for renegotiation and will help you achieve the lease you deserve.  Alternatively, get in touch with Ken or Ed (or any of our advisors) and they will ensure Lpc Cresa helps you improve your accommodation arrangements. All the best as you navigate the pandemic.

Contact: Ken Lam -  Klam@lpc.com.au | +61 411 133 944 or Ed Andrews - eandrews@lpc.com.au | +61 421 239 021
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