Negotiating end of financial year leases

With the financial year nearing a close, many landlords and tenants will be in the final stages of negotiating or renewing a lease.

Those who have been on either side of the fence know there are often imbalances in power in this process, skewed towards either landlords or tenants.

A current example is the frozen yoghurt sector, which is going through a growth period and has several hundred operators across Australia. Trending retailers such as these are often more eager to lease a site than the average business, and are willing to accept site locations that others are not.

There are often imbalances in power in this process, skewed towards either landlords or tenants.

Having a popular new retailer on the market gives the landlord more bargaining power to demonstrate to the sitting tenant that there is another retailer willing to take the site at a high rental.

With such imbalances, how can landlords and tenants ensure they are satisfied with the deal? There are a number of areas in the negotiation process that require consideration from both parties.

Short vs long-term leases

Tenants should pay particular attention to the length of the lease. A short-term lease is almost always to a tenant’s benefit. Shorter leases give more flexibility if the needs of their business change.

However, a long-term lease ensures a tenant will have an affordable business space for a predictable period of time. This is important for tenants that have location-sensitive businesses, such as a retail store. But they must remember – there’s also an element of risk in signing a longer-term lease, in case the business is not successful.

A good solution for tenants is to bargain with the landlord for a two or three-year lease, with an option to renew for two or three more years. Typically, this gives the tenant the right to exercise their option to stay by notifying the landlord before the initial lease expires. However, they should also expect the landlord to ask for higher rent.

Rental increases

Landlords will usually include an annual rent percentage increase in the lease terms, because they are looking to maximise their return on investment and match market rents.

The types of increases vary from a fixed percentage to an increase based on the Consumer Price Index, and can be negotiated between the tenant and the landlord. If the landlord insists on keeping an annual rent increase clause, tenants may want to negotiate a cap on the amount of each year’s increase, rather than calculating by CPI. A fixed price increase allows the tenant to ensure predictability and it also reduces the risk of the rent outpacing a business’s profits.

Using a broker

A solution to address some of these imbalances is to engage a broker.

Most small business owners only negotiate a lease once every five years or so, whereas an experienced broker will cover up to 20 leases a year, and is more aware of the market rents, centre activities and new developments.

A solution to address some of these imbalances is to engage a broker.

Brokers are well positioned to help the tenant negotiate the best deal for leases with options to renew, as well as assist in negotiating fixed rent increases.

Landlords can also benefit from dealing with a broker, who has the experience and knowledge of the surrounding market, therefore removing emotion from the process, and sometimes shortening the negotiation period. The broker also serves as a “translator” between the two parties, and can prevent misunderstandings that tend to arise in direct negotiations.