This is part 1 of a two-part series of insights on the problem of systemic conflict of interests in the advice and representation provided to commercial tenants and what they can do to combat the impact of an industry structure that promotes conflicted advice.
"Never take the advice of someone who has not had your kind of trouble." - Sydney J. Harris
Systemic conflict of interests in the advice provided to commercial occupiers?
"Knowledge has power. It controls access to opportunity and advancement." - Peter Drucker
There are many examples of systems that advantage certain parties and disadvantage others: the apartheid system in South Africa, which advantaged the minority and disadvantaged the majority, criminal justice systems with lighter sentencing for certain demographics, and systems where schools in affluent suburbs are better funded thereby perpetuating superior education for higher income groups. The systemic advantage that commercial landlords have over tenants is more subtle, for the advantage is founded on an industry structure that favours landlords. This facilitates landlord power to resist changes to lease norms that increase landlord risk with potential asset value impairment. The following four aspects of the tenant advisory industry structure are particularly impactful when it comes to preserving lease norms that favour landlords:
Property-focus versus business-focus: A commercial property investor's primary concern is optimising their return on investment. This objective underpins their business plan, strategies, systems, processes, and operations. On the other hand, commercial tenants are focused on their business, not property, with property commitments incidental to their core business focus. Thus, landlords have an expertise advantage in lease negotiations and make every effort to protect this advantage.
Consolidation versus fragmentation: Commercial property investors share a common objective, to optimise their return on property investment. This shared objective leads to structures such as landlord associations, which protect landlord interests through advocacy for landlords, resistance to change in lease norms, and extensive influence over the public domain narrative, relevant legislation, solicitor work, and commercial leasing norms. By contrast, commercial tenants represent diverse business interests and are fragmented, with limited influence on lease norms.
Asymmetrical access to information: When your business is property, access to property data is necessary for decision-making and an ongoing priority. In an industry that lacks transparency, commercial tenants are at a distinct disadvantage when it comes to accessing data that can be relied upon to strengthen the tenant's negotiating leverage. On the other hand, landlords have their own records and implement measures to ensure their leasing data is current, complete and helpful for building landlord leverage.
Control over advisors: This may well be the most impactful of the four aspects of the tenant advisory industry that favour landlords. Leasing originates with the landlord, who must lease premises to generate a return. The landlord remits to their solicitor to establish lease templates with terms and conditions that transfer the risks of ownership to the tenant whilst the landlord retains the benefits of ownership. The landlord remits to leasing agents and advisors to protect risk-free, escalating occupancy income, and the commission structures support this. Multinational property services companies derive over ninety per cent of their income from landlords via leasing commission trails, capital transactions, and workplace services, with management systems that are structured to promote cross-selling that benefits both the multinational property service company and property investors. This conflict of interest in favour of landlords is embedded in lease documents and in the extensive advisory reach that these firms have via their branch offices and multidisciplinary teams.
Concluding comment
This article started with Peter Drucker’s observation that “knowledge is power. It controls access to opportunity and advancement.” This describes the structure of the commercial real estate industry, which entrenches asymmetrical access to knowledge and embeds landlord advantage. The article sets out four industry structure aspects that protect and reinforce landlord advantage systemically. Part two of this series will focus on what can be done to reverse this trend and bring about lease norms that better support tenant enterprise.
Who is LPC, and how we help futureproof accommodation arrangements
LPC is a conflict-free advisor to commercial tenants across Australia and New Zealand. We facilitate strategic review of accommodation strategies, represent occupiers to secure best-fit accommodation arrangements, provide lease management services to multi-site occupiers, and oversee client fit-out and relocation.
Contact us to help with your accommodation strategy review.
