Commercial Lease Negotiation - Should we request a formal review?

Discussion in 'Commercial Property' started by Average_Joe, 23rd Aug, 2019.

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  1. Average_Joe

    Average_Joe Member

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    Afternoon PC'ers,

    Long time Somersoft/PC reader, first time poster.

    I've learnt' a lot from this forum, mostly in and around resi investments, however am not fully across commercial and would appreciate some advice from some of the guru's on the forum.

    A friend and I own a business in Frankston VIC and have recently exercised our 5 year option. We are negotiating the rent and the landlord is not looking to budge, with our only option a formal review by a third party.

    Initial lease details:

    Lease Term: 5 + 5
    Initial Rent: $38,000 plus GST and outgoings
    Rent psm: $103 psm
    CPI: 4% pa
    Property: 1st Floor Office property (370 sqm)

    Proposed lease details:

    Lease Term: 5 + 5
    Initial Rent: $44,454 plus GST and outgoings (essentially holding last years rent for another year)
    Rent psm: $120 psm
    CPI: 4% pa
    Property: 1st Floor Office property (370 sqm)

    I'd like to understand how i can get an idea of what market rent is without engaging a 3rd party valuer first? I've tried CommercialRealEstate.com.au however am having trouble finding actual rental prices.

    If anyone had any resources or knew websites that could assist that would be great.

    AJ
     
  2. Scott No Mates

    Scott No Mates Well-Known Member

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    Hi @Average_Joe - just to clarify a few things:
    Your business is the tenant
    The business has exercised the option
    The new lease is the option term (so only 5 years not 5+5 remaining)
    Ratchet clause applies (this is not a retail lease)

    What is the option clause - is the rent review at Option fixed, CPI/% or a market rent review (ie the owner proposes a market rent you either accept or negotiate). If you fail to agree, then an adjudictor is appointed.

    If you do your market research (you can appoint a valuer to provide you with the analysis of the market of registered leases without having them represent the claim with the arbitrator at this stage). How much do you believe you are currently over-paying (ie how far above market do you believe the proposed rent sits?).

    Is there a ratchet in the lease for the commencement rent at option? ie can the rent drop at option?

    Has the landlord provided a rent in accordance with the terms of the option? eg: Is it a market review or has the owner provided a fixed, % or CPI increase? My calculation of the rent review is that the LL has not applied a % increase for the initial term of the new lease.

    Depending upon how the option and market rent review clause are constructed and to be interpreted, will there be a saving/rent reduction (ie is this possible)? Would you have been better off negotiating a new lease instead of exercising the option?

    This is where a tenant representative works in your favour (better than a solicitor for this type of exercise).
     
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  3. spludgey

    spludgey Well-Known Member

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    If you're the landlord, take the proposed lease! Great increase for there not having been much rental growth!
     
  4. Average_Joe

    Average_Joe Member

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    Thanks @Scott No Mates and @spludgey for your replies.

    To confirm:

    - My business is the tenant. I am leasing the property
    - The lease states we can have a market review at the end of each period (potentially lower than what’s been proposed, not a retail lease)
    - What has been proposed is to leave the rent at the existing rate for this year (1st year of option) with 4% CPI increases YOY
    - I’m looking for advice/website/resource to help me navigate how I can calculate what market rent is today so I can gauge if it’s worth exploring a valuer to conduct the review

    I do think that what the landlord has proposed is above market, however would like to be sure and have some examples of similar properties before engaging a valuer.

    Thanks again
     
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  5. Scott No Mates

    Scott No Mates Well-Known Member

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    @Average_Joe - The valuer uses paid subscription services to research the market for registered lease deals - these are the only thing which will be relied upon when it comes to an adjudication. Their experience and knowledge in filling in the blanks for you is invaluable whether it goes to adjudication or not - you need this information as there are no free services around for commercial leases. Title searches are the way forward and copies of registered leases can be obtained via the land titles office but there is quite a deal of work required to get to that point.

    Even if you are prepared to ring around the commercial agents who'll give you a ballpark of what the rent was concluded you will still be in the dark as to the other terms of the lease which weigh just as significantly on the true rent.
     
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  6. Beano

    Beano Well-Known Member

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    SNM is 100pc correct.

    Tenant or landlord using a registered valuer is the only reliable method to value a premise .

    These valuations are specific to the property as location and premise can differ.

    With that rental probably only one valuation is necessary but if the rental is substantial and/or the period between market reviews long then I would get several valuations.

    Well worth the cost
     
  7. Property Guts

    Property Guts Well-Known Member

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  8. Scott No Mates

    Scott No Mates Well-Known Member

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    And that's precisely why you'd use a valuer, to discover all of the relevant market transactions.