Commercial Real Estate – Common Problems in Lease Negotiation Today

Today a successful lease negotiation is more important than ever before for the landlords of investment property as they struggle with vacancy factors and downward pressures on rental. It can also be said that the selection of tenant within the tenant mix can also be critical to the future of the property. Planning and control are everything in commercial investment property. As a leasing manager or property manager, it is up to you to control the leasing negotiation process.

The businesses that occupy the tenancies in investment property today can be under some financial pressure and strain as the pressures of the economy prevail. Rent arrears are common as is the threat of vacant space. A good property manager or landlord will seek to stay in front of the problems and take positive steps to minimize vacancy factors and loss of rent for the landlords that they act for.

Importantly as agents we need to prepare for the property challenges and negotiate clearly on behalf of our client. These are some of the most common problems we see today with commercial tenants in and with lease negotiations:

  1. The tenant will compare many properties to achieve the best possible rental result. This says that the property with the lowest rent will attract more attention, all other things being equal. A property with a high asking rent will be difficult to lease. Landlords should take care in setting rents for new premises and marketing those rents. It is very easy to stifle enquiry when you ask unrealistic rents; the first few weeks of a marketing campaign are really important to generate enquiry from the local area and business tenants seeking new premises.
  2. Lease incentives today are commonly sought by tenants. The incentives could be rent free, fit out contribution, cash, lower rentals, lower outgoings, or shorter lease term. Given that the property market is biased towards the tenant at this time, the landlords of investment property should adjust their thinking and lease requirements to make the vacant space as attractive as possible to the enquiring prospect.
  3. Tenants like to get access to the premises early as part of fit out construction and preparation for occupancy. Whilst this seems to be a simple request, it can be the biggest mistake ever made when it comes to finalizing the lease. Once you give a key to the tenant is quite likely that lease negotiations will become less important for the tenant and not reach finality for the landlord in a timely way. The golden rule here is not to pass over the key to the tenant until such time as all lease documentation and obligations have been correctly completed.
  4. Some form of lease security should be obtained from the tenant for the landlord to draw upon in the case of lease default. Directors Guarantees are of little benefit to the landlord today as assets of Directors shift and are taken by other creditors. It is better to obtain security in the form of cash or a bank guarantee for the landlord. This lease security should be retained by the landlord for the duration of the lease and until satisfactory lease termination.
  5. The payment of rental, outgoings, and other charges under lease documentation should be policed rigidly. Should the tenant not pay the necessary money as invoiced by the due date, then a notice of lease default should be served in accordance with the terms of the lease. It is essential to talk to the landlord and seek the appropriate authorities before this default action occurs.
  6. Rent review and option negotiations can be protracted and slow in a property market like that which we have today. Make sure that you have captured all the critical dates under the existing lease documentation so that you can act in an accurate and timely way with the tenant and the landlord.

Some of these matters above can be quite frustrating and time consuming for all parties should they occur. As a leasing manager or property manager, it pays to keep on top of the tenant relationships, tenant mix, and lease documentation.

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