Without doubt the number one problem for any office fitout is leasing. Specifically, the time it takes for the opposing solicitor’s to agree on terms and conditions and get both parties together to sign the documentation.
I have seen very keen tenants pull-out at the last minute due to the landlord’s strange antics. I have seen other companies wait over nine months whilst leases are sorted out. And I have seen my client miss out on space due to lack of commitment and someone else has slipped in and leased the premises from under him.
Just like design and office fitout, leasing premises is not something you do every day and when it represents such a large chunk of the business overhead, then it makes sense to be sure about your actions.
The other thing about leases is that they are a long-term commitment so the deal needs to stack up over time.
Once you are happy with your final property selection, you need to:
- Employ a good commercial solicitor who understands time is important to you.
- Negotiate the final position on price and conditions, ensuring that the deal has been put together correctly and is in line with your requirements.
- Ensure you have a suitable rent-free position or considerable fitout contribution to put towards your office fitout construction costs.
- Should you receive a fitout contribution, see how this affects your overall tax position and does the deal still stack up? Employ a quantity surveyor for expert advice in this area.
It will pay to understand some of the common terms used in the industry.
Heads of Agreement
In a commercial property transaction in Australia, a Heads of Agreement is often known as the Heads of Terms (HOTS). The main purpose of the HOTS is to identify and highlight the requirements of both the Lessor (owner) and the Lessee (tenant) of the property. There are a number of advantages of using concise and comprehensive heads of terms. For instance, both parties will fully understand what they are subject to, thereby reducing misunderstandings from either party. The heads of terms normally contains the following information:
- Details of the owner – Lessor, including the legal entity or company holding the lease, address and AustralianBusiness Number (ABN).
Details of the tenant – Lessee, details of the company, registered address and ABN.
Street address of the commercial property, including the legal description, which may include a f loor/suite number.
Details of the commercial property accurately described in both size m2 and by a plan according to the Property Council Code.
The rent and outgoings expressed both in m2 and actual amounts that both parties have agreed to.
The Good and Services Tax (GST) position.
Rent reviews, the frequency and pattern.
Options and options notice.
Make-good, if any.
Inventory, if any.
Legal fees and who pays
The standard lease and which party provides the draft.
Schedule of condition at the start of the lease.
Lease commencement date.
Rent commencement date.
The payment information.
Any special conditions.
Target lease signing or lease commencement date.
Transaction completion date.
One of the standard inclusions in an offer to lease, after the commercial terms such as rent and term, is a vague requirement for the tenant to make-good the premises at the end of the term. This is detailed in the lease and usually at a minimum requires the tenant to return the premises to the condition it was in at the commencement of the lease, remove its property and leave the premises clean and tidy.
If a lease does not contain any provision, a tenant would be required to comply with its legal obligations as described in the lease, which require a tenant to return the premises to a similar state as it was in at the commencement of the lease, except for fair wear and tear. If a tenant breaches this legal obligation, the landlord can sue the tenant for any loss it has suffered as a result of the tenant’s failure.
A way to ensure a fair settlement at the conclusion of your lease is to ensure that you prepare a ‘Schedule of Condition’ being a full report on the condition of the existing premises before you take occupancy. This should include a marked-up floor plan defining any problems with the existing tenancy, for example water marks on the ceiling or cracked floor tiles, condition of carpets: basically all faults you identified prior to taking occupancy need to be detailed in your report. Good photos are a must, so take plenty, they will save you money at the end of your lease.
The landlord (Lessor) will offer to pay a certain amount towards partitioning, amenities upgrades, air conditioning etc., which is defined as a dollar amount and can only be spent on the nominated items which usually are in the ownership of the Lessor until the end of the lease (for depreciation reasons).
Note: Even though the Lessor owns them, the tenant has the liability of removing them at the end of the term and redecorating.
As the term implies, the incentive is expressed for example, as ‘six months’ rent-free at the commencement’ or ‘rent relief per month over the term to the value of six months’ rent-free’ or a combination of both.
The amount of incentive in Sydney varies between five to thirty per cent of the aggregate value (all the years added) of the lease. It varies for different markets.
A simple illustration would be – initial rent $200,000 per annum (gross) for a five-year lease ($1,000,000 aggregate value). An incentive of 15 per cent therefore equates to $150,000 to be taken as a fitout contribution or a rent-free period. $200,000 p.a. = $16,666 per month, therefore $150,000 = nine months rent-free.
In practice the calculation of incentives can prove as complex as rent reviews over the lease and the time value of money are taken into consideration.
The building manager is responsible for managing the property that is available for lease, by maintaining and handling all the day-to-day activities that are centred around that piece of real estate. Property management may also involve seeking out tenants to occupy the space, collecting monthly rental payments, maintaining the property and upkeep of the grounds. Apartment complexes are normally handled by some type of property management company.
A typical Heads of Agreement sample would look like this: