Tenant friendly commercial lease arrangements can be achieved!

09 Dec 2021 03:13 AM

This is part 3 of our series on ‘Getting to tenant friendly lease arrangements’. 

In part 1 of this series we focused on why it is that ‘tenant friendly lease arrangements are not the norm’, and we highlighted 3 essential perspectives if ‘tenant friendly’ arrangements are to be achieved.   In part 2 we zeroed in on 3 mistakes that commercial tenants often make in relation to tenancy arrangements, and we highlighted the unwanted impacts of these mistakes. In part 3 we turn our attention to avoiding these mistakes in a way that leads to ‘tenant friendly’ lease arrangements that support the occupier’s business objectives into the future.  The underlying message is that tenant friendly lease arrangements are not the norm but that they can be achieved, and that the probability of this outcome is enhanced when the perspectives set out in part 1 frame one’s negotiations, and when measures are taken to eliminate the common mistakes described in part 2. 

The right mindset 


“Everything begins from the mind, including change. So, if you want to alter your life, you have to start with your mindset.” - Alexi Weaver 

In part 1 of this series, we made the point that tenant friendly commercial leasing arrangements are not the norm, and that the norm favours landlords whilst adding undue risk to the tenant’s business.  If tenant friendly leasing arrangements are to be achieved, and if Alexi Weaver is right that ‘you have to start with your mindset’ to bring about change, then it is essential that commercial tenants have a mindset that recognises the need, and the opportunity, to improve their tenancy arrangements. 

We previously explained how the structure of the industry favours landlords, as the supply side is consolidated, well-organised and powerful, in contrast to the demand side which consists of diverse and highly fragmented tenants.  So it is that property owners and leasing agents (gatekeepers tasked with looking after property owner interests) have far more influence on the commercial leasing norm than do tenants, such that owner income streams are well protected, notwithstanding factors beyond the tenant’s control that may diminish the tenant’s utilisation value during the term of a lease.  At LPC, our collective mindset is shaped by a shared determination to help shift this norm so that lease arrangements better support tenants.  We are persuaded about the need for more flexible and more productive lease arrangements, which include greater property owner assurances pertaining to the tenant’s utilisation of the leased asset for this is the sole reason for the tenancy.  We urge all commercial occupiers to adopt a similar mindset to bring about change such that leasing arrangements better support the tenant’s business.  

In part 1 of this series, we captured 3 perspectives which we suggest should underpin one’s mindset as one pursues improvement in tenancy arrangements.  In summary, and in reverse order: 

  • Tenants do well to remember that a tenancy arrangement is a negotiated outcome, and that ‘you don’t get what you deserve, you get what you negotiate’.  The buck stops with the party responsible for ensuring a tenant friendly outcome is achieved, and this outcome can be very different to the ‘norm’. 
  • Tenants do well to ‘think of a lease as buying utilisation with a warranty’ as this perspective helps a tenant zero in on the attributes of the leased asset that are essential to support their business, and this focuses the negotiation process on key terms that make the arrangement tenant friendly. 
  • Tenants do well to ‘know your opposition’ as this sharpens one’s understanding of the interests of the various parties involved in leasing arrangements, which puts a tenant in a better position to move the opposition to achieve more flexible and productive leasing arrangements. 

These perspectives may seem simple, but our experience is that that they are often not well applied when it comes to negotiating tenancy arrangements.  The problem is that tenant unfriendly norms have become well established and “the mind is slow in unlearning what it has been long in learning” (quotation - Seneca).  The typical outcome of this slowness is tenant acceptance of arrangements with undue risk transfer to the tenant.  The most obvious evidence that these 3 perspectives have not been well applied when negotiating tenancy arrangements is that very few tenants had lease protections relating to interrupted utilisation due to lockdowns.  The point is that these 3 perspectives cause a tenant to think through the potential for interrupted or impaired utilisation, and to negotiate reasonable protections in the event of impaired utilisation.   

The right process 


“If I had one hour to save the world, I would spend fifty-five minutes defining the problem and only five minutes finding the solution.“ - Albert Einstein  

Whilst ‘the right mindset’ is a pre-requisite for achieving tenant friendly leasing arrangements, ‘the right process’ is the enabler.  There is nothing easy about optimising a portfolio of leased premises or optimising a specific tenancy arrangement.   If an optimal solution is to be implemented then this will always require accurate definition of the problem(s) to be solved, clearly articulation of the intended outcome(s), and the implementation of a structured negotiation process.  Our front-end focus is why we resonate with Albert Einstein’s perspective. 

In part 2 of this series, we spoke at length about the importance of starting with the end in mind when it comes to tenancy arrangements for a leased portfolio or for a single site, and about accurately identifying the risks and opportunities to be addressed to achieve the required end in mind.  To apply Einstein’s counsel, this equates to spending a great deal of time ‘defining the problem(s)’ before determining and implementing the solution.  At LPC our solutions are process driven with a strong emphasis on the front-end of the process to ensure ‘business before space’.  This helps to ensure that long-term accommodation commitments are aligned with our client’s business objectives and strategies, whilst mitigating business risk through the lease term.  It is all too often the case that the problem(s) to be solved are not well articulated upfront, and this creates a level of ambiguity in the subsequent search and negotiation process, which ultimately leads to tenant unfriendly outcomes. 

We apply (and we recommend) a 4-phase process to solve most tenancy problems, moving from plan to generate to assess and finally to implement.  While the tasks per phase are adapted to suit the problem being solved (e.g., lease acquisition, stay-go, lease exit), the 4-step sequence ensures the problem(s) are accurately identified, that aligned alternatives are generated, that quantitative and qualitative assessment is applied to these alternatives, and that the optimum solution is implemented efficiently.  In relation to strategic reviews aimed at better optimising a client’s leased portfolio, we follow a similar 4-step process progressing from review to rethink to reset and to reposition.  In all cases our process is underpinned by a mindset that rejects the status quo, and by the pursuit of improvements in tenancy arrangements that better support the occupier’s business into the future.  The process ensures appropriate discipline is applied so that the correct problem is identified and addressed, whilst ensuring leverage is built to achieve the ‘end in mind’. 

The right collaboration 


“Alone we can do so little. Together we can do so much.” Hellen Keller  

This short statement by Helen Keller can be readily applied to commercial leasing. Tenants are fragmented with limited access to information and with limited influence on tenancy norms.  On the other hand, property owners (and leasing agents) are consolidated with considerable influence over tenancy norms.  The challenge for commercial tenants is to find ways to collaborate in a way that increases their influence on tenancy outcomes.   

One of the collaboration challenges that tenants face is to identify which advisors to collaborate with and for what purpose.  There are a great many reasons for tenants to collaborate with advisors and these include accessing market intelligence relating to occupancy costs, getting a clear picture of suitable alternatives available for lease, technical due diligence on a preferred premises, understanding how to optimise the utilisation of the premises, legal review of documentation, and getting advice from start to end in relation to the tenancy requirement that is being addressed.  These are very different advisory areas, and the extent to which advice received helps a tenant optimise their accommodation arrangements will be directly linked to the experience and the independence of the advisor.   

In relation to the tenant representation and lease negotiation, a tenant does well to validate both the experience of the advisor and that the advisory firm has no conflict of interest associated with services provided to investor property owners, for such ties inevitably disadvantage the tenant.  While our team at LPC has productive working relationships with investor property owners, we do not provide services to investor property owners, and we are unashamedly biased in favour of the occupier whom we serve.  This facilitates a collective mindset focused on changing the rules of the game in favour of occupiers.  We suggest that tenants do well to ensure any accommodation advice or representation received is conflict free, and that the advisory firm has a track record of delivering tenant friendly outcomes that support the occupier’s business objectives.   

An area of collaboration that is not well used by commercial tenants is the potential to work together within groups in a way that improves tenancy arrangements for the whole group.  This form of collaboration goes some way towards addressing the problem of fragmentation which limits access to key information and which limits tenant leverage.  At LPC we have initiatives which work against fragmentation and increase tenant leverage.  An example is out approach to portfolio optimisation where we collaborate with clients to review and reset a template of commercial terms best suited to each business unit, and where these terms guide negotiations and drive improved tenancy outcomes across the organisation.  Another example is the collaboration and subscription model we use in conjunction with associations and franchisors and local trade councils, whereby expert leasing advice is made more affordable and accessible to association members and franchisees, ultimately aimed at improving tenant know-how and achieving more tenant friendly accommodation arrangements. 

Conclusion 

Our focus in this 3-part series has been on how occupiers and tenants can bring about a step-change improvement in their accommodation arrangements.  In this article, we have addressed what we consider to be 3 essentials needed to achieve tenant friendly arrangements.  We are persuaded that the right mindset, the right process, and the right collaboration will result in any occupier improving their tenancy arrangements.  We are equally persuaded that getting it wrong in relation to any of these 3 essentials will result in tenant unfriendly arrangements. 

If you are a leader of business organisation, or a franchisor, or a head of property for a multi-site occupier, then you are most welcome to reach out to us to work with you to review, reset, and reposition your accommodation commitments to better align with your organisation’s strategic objectives and outlook.  

All the very best for 2022 and the challenges that lie ahead. 

About LPC & the LPC subscription service 

LPC provides office, retail, and industrial occupiers with advice and services that make a difference to their accommodation arrangements and respective businesses.  With no ties to investor property owners or leasing agents we only represent occupiers, and our advice is free from any conflict of interest that would disadvantage an occupier. Our single purpose is to help commercial occupiers optimise their accommodation and tenancy arrangements. You will find the LPC subscription service most useful when it comes to identifying key terms for renegotiation and getting to the lease you deserve.  

Contributors to this article: 

Ken Lam -  Klam@lpc.com.au | +61 411133944  

Gillian Heath – gheath@lpc.com.au | +61 404329283 

Julian Kurath - jkurath@lpc.com.au | +61 404499419 

Michael Raymond - mraymond@lpc.com.au | +61 419477712 

Dylan O’Donnell -dodonnell@lpc.com.au | +61 411222836 

Adrian Gerber - agerber@lpc.com.au | +61 409001004 

John Reed - jreed@lpc.com.au | +61 438648678 

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