Let’s face it, you’re in business to make money and an important factor in keeping more of your income in your pocket is by reducing your overheads. Renting commercial premises is a hefty portion of your fixed business expenditure so you need to know how to negotiate a deal with your landlord that won’t blow out financially down the track. There are factors that will affect how much your premises will cost you, now and further into the term of the lease. They are:
- The rent,
- Outgoings,
- Rent reviews, and
- Maintenance.
Rent
It seems obvious but have you done your research? That is, have you checked what the going rate is for the location and compared it to the rent you are being asked to pay?
Double check the calculations and the area. That is, if it is $XX per square metre, do the math yourself and make sure the rent rate is accurate.
What is the vacancy rate in the area? If there are a lot of empty shops/offices/warehouses close by, then you may be able to negotiate a lower rent or another incentive such as an initial rent-free or reduced-rent period. This helps your bottom line if you are in the challenging position of establishing a new business.
Can you negotiate early access to fit out the premises before your rent obligations start? Will the landlord contribute towards these costs? If it is a retail premises, be aware that most of the legislation asserts that a tenant should not start paying rent until the landlord has complied with the majority of their fit-out obligations.
Outgoings
“Outgoings” is the term given to the costs borne by the landlord for operating, maintaining and repairing the premises. These include rates, water charges, security costs, body corporate fees, customer facilities, parking, cleaning, etc. Outgoings are either incorporated in the base rental amount or charged separately to the tenant as they occur. The landlord cannot charge you for outgoings unless they have the right to do so under the terms of your lease. If outgoings are charged as additional costs, you will need to understand:
- The total amount of the outgoings you will be liable for;
- Exactly what outgoings you are paying for;
- How the outgoings are calculated;
- How costs will be reviewed; and
- How the Landlord will disclose and evidence the costs.
For example, let’s say you are renting a warehouse unit in a complex of 4 units that are owned by the same landlord. You should only be expected to pay a pro rata amount on some of the charges that correspond to your percentage of the total area. In other words, you should not be responsible for 100% of outgoings if other tenants within the complex share the benefit of them, but rather, the cost should be apportioned between you on a pro-rata basis. This may include costs such as garbage removal charges, rates that apply to the whole lot where there are several tenants, security costs that relate to the complex as a whole and any other expenses that relate to shared resources or benefits.
It is more difficult to gauge the outgoings accurately if they are incorporated in the base rental figure. However, it will give you a more accurate idea of the cost you will be liable for under the lease, as some outgoings can only be estimated and never known with precision. You can ask the landlord for an idea of how the rent amount has been calculated and the percentage that represents outgoings. Once you have an idea of the proportion of outgoings to rent, you can compare the rent to similar premises in the area. You can request more information about the outgoings proportion if you feel necessary and this may give you more ammunition with which to negotiate.
Rent Review
Rent reviews are a fact of life and your lease will contain a whole section on this subject alone. The three most common types of rent review are:
- CPI – The rate of increase is controlled by movements in the CPI (consumer price index);
- Fixed percentage – e.g., 3%; and
- Fixed amount – e.g., $75.
Consider the frequency that the rent reviews will occur. For example, will the rent be adjusted every six months, yearly, or every three years? Take the time to calculate how the reviews will affect you and make sure you can absorb these costs without hardship. This is especially important if you are comparing initial costs that may include incentives such as rent-free periods, to later years of the lease term, which do not and may impact negatively on your bottom line.
Ongoing maintenance and repairs
Some landlords require tenants to undertake regular maintenance such as painting, fit-out or landscaping. Make sure these requests are reasonable and that you aren’t being asked to pay for items that are the landlord’s responsibility. Checking for these hidden costs during the negotation phase gives you two advantages… Firstly, you will have a more precise idea of the cost of the lease over the term, reducing your risk of falling victim to unexpected financial bombshells. Secondly, you will be more informed when negotiating. This will serve to keep the landlord on their toes and ensure that you have the best chance of getting the best deal.
