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FAQs – Commercial Office Leasing

5 June 2020

Have a few questions about Commercial Office Leasing?

We have collated 25 of our most frequently asked questions, ranging from the start of the leasing process all the way to occupation.

1. HOW AND WHERE DO I BEGIN MY SEARCH FOR NEW OFFICE SPACE?

There are over sixty (60) Commercial Leasing Agents working the Brisbane CBD and CBD Fringe areas. Office space for lease is often marketed through online portals such as realcommercial.com.au and commercialrealestate.com.au where you can direct enquiries to a variety of agents.

Some prospective Tenants will walk the streets and call off sign boards, albeit this is far less frequent than it used to be. Alternately you can contact all or some of the property services firms and ask to speak to an office leasing team member directly.

By reading this document you have indirectly started your search. Caden Office Leasing is the largest independent office leasing business in Brisbane. We have access to and information on all office space for lease across Brisbane regardless of how big or small your requirement is.

2. IF I DON’T NEED THE SPACE IMMEDIATELY SHOULD I DELAY MY SEARCH UNTIL I DO?

Not necessarily. In the current market many Landlords would prefer to capture a Tenant (assuming the lease terms are acceptable) even if the commencement date is not immediate.

For example, it is not uncommon for a Landlord to lock in a lease and rent commencement date 4-6 months beyond when a Tenant is prepared to begin a lease. This timeframe could be longer if the space has been sat vacant for quite some time.

Larger space occupiers will find that prospective Landlords are prepared to commit to a lease further in advance than they would for smaller space occupiers. An experienced leasing agent will be able to advise you on this.

3. HOW MUCH SPACE DO I NEED?

Every business has their own unique requirements, but many companies are now preferring to have their staff occupy largely open plan, collaborative working environments.

The majority of open plan office spaces are designed to accommodate staff at a ratio of approximately 1 person per 10m2 – 12m2 (of space). Tenants that have requirements for a greater number of offices (legal firms for example) will generally design their tenancies at a space per person ratio of more like 1 person per 15m2 – 18m2.

It is best to start by determining the number of people that you are looking to house. An experienced leasing agent will then be able to provide a size range for you to work with. It is important for tenants to get out and have a look at some premises early in their search as it often helps to give context around the sizing of space.

If a Tenant has a strong preference to do a new fit out rather than find a tenancy with an existing fit out, it is then organised for a designer to do an indicative space plan to ensure the search is focused on tenancies of the right size.

Caden’s office space calculator is also a great tool that will give you an estimate if your space requirements. This can be found at www.caden.com.au/office-space-calculator/.

4. WHAT INITIAL COSTS ARE INVOLVED IN TAKING OUT A LEASE ON AN OFFICE SPACE?

1) Most Tenants will engage a lawyer to negotiate a lease on their behalf and therefore incur legal fees;

2) A Tenant may be required to pay the cost of any Title Searches or other supporting documentation required to support the lease;

3) A bank guarantee is generally required (by the Landlord) as security against the performance of a lease. Most financial institutions will charge a fee to coordinate and produce a bank guarantee;

4) If the Tenant needs to update their insurance policies (as per the lease) to comply with the lease their insurance company may charge a fee for this.

Note* It is important to check with the Landlord should they require any other payments, particularly if you are undertaking a fit out within the premises. It is also important to check with your solicitor should there be any other costs applicable under the lease.

5. HOW MANY PROPERTIES SHOULD I INSPECT BEFORE CHOOSING A PREFERRED SPACE?

This largely depends on the individual. Some Tenants like to look at a range of properties/tenancies and others prefer to look at a lot less. Market conditions at the time of the search may also dictate how many properties are available to inspect. If vacancy is low there may only be a few viable options, whereas if vacancy is high there could be many.

The vacancy rate within the Brisbane CBD is currently trending above the long-term average and therefore options are aplenty.

In general terms, many Tenants don’t have an exact brief at the beginning of their search. Therefore the process of inspecting tenancies is important in assisting them in making decisions as to the size of space, appearance and budget.

Ultimately there is no right and wrong answer to this question. An experienced agent will show a prospective tenant as many spaces as is required for them to be sure that they are making the right decision.

6. WHAT IS A HEADS OF AGREEMENT DOCUMENT?

A Heads of Agreement, properly drafted, is a non-binding document which sets out the key terms of a proposed agreement between parties. A Heads of Agreement is provided to a Tenant prior to formally entering into a lease and Landlords will require a signed HOA before instructing their solicitors to prepare a lease.

7. WILL A PROSPECTIVE LANDLORD REQUEST INFORMATION ABOUT MY BUSINESS BEFORE ENTERING INTO A LEASE AGREEMENT WITH ME?

Most Landlords will request ATO approved financial statements for the previous 2 – 3 financial years to understand the financial status of the company.

They may also run a company search to find out more information about the specific entity that the lease will be in such as:

• When the company was incorporated;
• Who the current Directors are;
• Whether there have been (or currently are) any insolvency procedures against those Directors; and, • A personal finance statement.

A prospective Landlord may also require other information (at their discretion) to satisfy themselves that the Lessee is of sound financial footing. A Landlord may also want to see a detailed business plan, particularly if the company is relatively young.

In summary, a Landlord is interested in your assets v liabilities so they can make a fair assessment as to whether the a company can meet the obligations of the lease.

8. WHAT HAPPENS IF THE LANDLORD IS NOT SATISFIED WITH THE INFORMATION PROVIDED?

In this instance, the Landlord may request a meeting with the prospective Tenant to understand more about their business in order to make an informed decision as to whether to proceed with the lease.

If the Landlord is not totally satisfied that the Lessee can fulfil the obligations of the lease they may decide not to proceed. Alternatively, the Landlord may decide to request that the Lessee provide a greater level of security (i.e an increased bank guarantee, personal guarantees or both).

9. IF I SIGN A LEASE AND THEN DON’T REQUIRE THE SPACE ANYMORE CAN I GET OUT OF IT?

Unless you are able to assign the lease to another company on the same (or better) terms of your current lease and have the Landlord surrender your obligations, there is generally no way of being able to walk away from your obligations. Typically, the best way to generate cost recovery on a space that you no longer need is to sublease the space but that could be at a significant discount to your current passing rent.

In a rising market (for the Landlord) a building owner may look to take back a space if they have another Tenant that wants it and is prepared to commit to the space on better terms (higher rent, longer lease term etc). Typically a Landlord will still require a penalty payment of some description.

If you need to exit your lease it is important to communicate with your Landlord just in case they have another Tenant that may want the space or are looking to reclaim the space for another purpose (i.e to create further Tenant amenity within the building such as a Business Centre, for example).

10. WHAT ARE INCENTIVES AND HOW DO THEY WORK?

Supply and demand of office space dictates the level of overall vacancy (available stock for lease). The vacancy rate will move up or down depending upon market conditions. If Tenant demand is high and the supply of new stock is low, you could expect the vacancy rate to trend downwards and vice versa. If vacancy rates are high and competition to secure new Tenants is fierce a landlord may provide a far greater level of incentive (money) to attract a Tenant.

A lease incentive is calculated by looking at the first year’s income, multiplied by the total term of the lease, then applying a percentage discount to this term value.

As an example, assume an office space of 100m2 at $600/sqm gross for a lease term of 5 years giving a term value of $300,000 plus GST and a lease incentive of 20% being $60,000 plus GST.

An incentive is a pool of money offered by a Landlord to a prospective Tenant to incentivise them to lease their space/ property.

These monies are set aside by the Landlord, on behalf of the Tenant, to be used as a contribution towards fit out, rental abatement (or rent free periods) advisory fees or a combination of all three (3).

Incentives are common across all mature office markets in Australia. There are times within every cycle where vacancy trends down to very low levels. There may come a point whereby landlords choose to stop offering incentives if they deem the market favourable enough and therefore it should not always be taken for granted that incentives will be on offer.

11. DO I HAVE TO PAY A DEPOSIT? IF SO WHEN AND HOW MUCH IS IT?

Upon signing of a Heads of Agreement and, subsequent acceptance of that Heads of Agreement by the Lessor, a deposit payment is generally required before the Landlord will instruct their solicitors to begin drafting the lease documentation. It is common for the deposit amount to be one (1) month’s rent plus GST. The deposit is held in trust pending the successful negotiation of the lease. Once the lease is afoot, the deposit monies are generally applied towards the first months rental payments.

12. WHAT IS A GROSS LEASE V A NET LEASE?

A gross lease is where a Tenant pays a base rent and does not contribute for outgoings or expenses accrued for the property. The scope and method of recovery of outgoings will be defined in the lease and may vary depending upon negotiations between the parties when the lease was established.

Typically outgoings includes expenses such as:

• Rates (incl. Water & Sewerage charges);
• Land Tax;
• Building Insurance;
• Body Corporate Fees;
• Property Management Fees;
• Repairs, cleaning, gardening, and maintenance but excluding capital items and development costs.

When agents quote a ‘gross’ rent that figure will include building outgoings but the Landlord will generally have a mechanism to charge the Tenant for any ‘increases’ in building outgoings at the end of each base year. It is therefore fair to say that most gross leases are in actual fact semi-gross.

A net lease structure is where a Tenant pays all of the operating expenses in addition to a net rental rate. There are a few different net lease structures so check with your agent.

13. WHEN AGENTS TALK ABOUT “INCREASES IN OUTGOINGS OVER BASE YEAR” WHAT DOES THIS MEAN?

Many quoted gross leases are in actual fact semi-gross and not fully gross. The reason for this is that gross leases often allow for the Landlord to recover any increases in outgoings outside of the quoted rental rates.

Ask the leasing agent to explain this if you are not familiar with the clause.

14. IF I AM LEASING A SPACE THAT REQUIRES FITTING OUT, DOES THE LANDLORD PAY FOR THAT OR DOES MY COMPANY HAVE TO PAY FOR IT?

This depends on how the lease has been negotiated/written which will generally be influenced by market conditions at the time.

Unless market conditions are incredibly favourable towards building owners, some level of incentive will generally be offered by the Landlord to the Tenant. Often this incentive will be available as fit out contribution, rental abatement or a combination of both.

The incentive may or may not cover the cost of the required fit out works and therefore it is important for the Tenant to understand the value of these works before committing to a lease. The quantum of incentive applied towards fit out contribution has a direct correlation to the ‘effective’ rent (after incentive) that will be paid by the Tenant during the course of the lease.

Most Landlords prefer that the Tenant engages the fit out contractor directly, pays for the fit out works themselves and then seeks a reimbursement from the Landlord once the works have been completed to the satisfaction of the Tenant. Alternately the Landlord may fund the works via progress claims as the fit out is being completed.

Given favourable market condition for Tenants in recent years, many Landlords have been controlling the fit out works on behalf of the Tenants as a turn-key solution. It is yet to be seen whether this trend will continue once market conditions become more favourable on the Landlord side. The incentive deed (which forms part of the lease) should outline each parties’ obligations.

It is important to check the structure of the lease with the agent and/or the Landlord if you are not absolutely clear about who is funding the fit out works.

15. AT WHAT STAGE SHOULD I ENGAGE A SOLICITOR TO ASSIST ME IN PROCURING SPACE?

It is common practise for most Tenants to engage a solicitor after they have signed the Offer To Lease (Heads of Agreement), in preparation for their solicitor to review the lease once it has been prepared (by the Landlord’s solicitor). That being said, the Tenant is well within their rights to engage a solicitor at any stage of the process, and some Tenants do have their solicitor review the Offer To Lease document.

16. IS THE COST OF CAR PARKING INCLUDED IN MY RENT OR IS THAT AN ADDITIONAL COST?

Car parking will generally always come at an additional cost. The costs vary from building to building and car park to car park.

The costs can be quite significant.

In buildings where the Landlord has leased out their entire car park to an operator (i.e. Secure Parking, Wilson Parking et c.) generally the operator then has full control of both the number of bays and the cost of bays offered to Tenants within the building.

As a Tenant you are under no obligation to park within the same building in which you lease space and there are plenty of car parking stations to choose from. The costs may vary quite significantly between each so it is important to research this carefully.

17. WILL I BE ABLE TO GET ACCESS TO THE SPACE BEFORE I MOVE IN?

Tenants can generally expect to be given access to their new Tenancy before the official lease commencement date to give them time to move in their belongings and ‘set up’ the space in the way they need. This period of time is subject to negotiation with the Landlord.

Some Landlords may also allow a Tenant to move in and occupy a space before the official lease commencement date, but they are under no obligation to do so unless this has been agreed during the lease negotiation process and often the Tenant is relying on the Landlord’s goodwill in this regard. Ask your agent if you need confirmation around this.

18. DOES THE LESSEE OR LESSOR OWN (AND DEPRECIATE) THE FIT OUT WITHIN MY SPACE?

In most instances the Landlord will seek to retain ownership of the proportion of the fit out that they have paid for (normally via an incentive).

For example, if a tenant is taking on an unfitted space and they use their incentive to fit out part or all of it, it is the Landlord who is funding these works. Therefore the Landlord will retain ownership of the fit out up to the value they have contributed and this will give them the right to depreciate it.

A Tenant may choose to fund part or all of a fit out themselves and therefore they will retain ownership of that proportion and have the right to depreciate it.

19. CAN I EXPECT TO BE GRANTED AN ‘OPTION’ TO RENEW MY LEASE WHEN THE FIRST TERM COMES TO AN END?

Most Landlords will not willingly offer an option or options to renew a lease once the initial term has run its course, particularly for smaller space occupiers (i.e. sub 550sqm).

It is very common for Landlords to resist providing options altogether (where they can) and they will only change their position on this if the Tenant continues to demand an option be provided and it is a lease deal that the prospective Landlord is motivated to do.

20. WILL I GET A BETTER DEAL IF I COMMIT TO A LONGER LEASE?

This depends upon the Landlord’s leasing strategy. Many Landlords do have a preference for longer term leases and will often be able to be a little more aggressive on the terms they provide to a Tenant on this basis. Five (5) years or more would be considered long-term for a generic commercial lease.

21. IF I LEASE A TENANCY THAT HAS BEEN NEWLY FITTED OUT ON SPEC BY THE LANDLORD, IS THE LANDLORD OBLIGED TO PROVIDE ME PROOF OF THE COSTINGS?

It is at the discretion of the Landlord. Some Tenants like to know him much money the Landlord has invested into the fit out so they can calculate the total value of the incentive.

Some Landlords are of the view that this information is sensitive and does not need to be disclosed to the Tenant, particularly as the Landlord will (in most instances) retain ownership of the fit out.

A Tenant will ultimately determine whether they feel they need full disclosure of the fit out costs for the purposes of transparency.

22. HOW MANY ACCESS PASSES AM I LIKELY TO GET AND DO I HAVE TO PAY FOR THEM?

Access passes are solely at the discretion of the Landlord. In general terms it would be fair for a Tenant to expect to be provided with an allocation of access passes free of charge. This allocation is normally based on a ratio of passes to NLA (Net Lettable Area) and, beyond the initial allocation, the Tenant would pay for any additional cards.

Although this is the most common structure, it is not a blanket rule and it is important to check with the agent exactly how many cards the owner is prepared to provide at no charge (if any) at the commencement of the lease and what the charge will be for additional cards.

23. IF THE PROPERTY I CHOOSE PROVIDES END OF TRIP FACILITIES, WILL I HAVE TO PAY A FEE TO USE THEM?

Some Landlords charge a monthly fee for a locker within their respective End of Trip Facilities. Other Landlords may choose to provide this amenity at no charge or include it as part of their outgoings.

24. HOW DO I KNOW THE SERVICES SUCH AS AIR-CONDITIONING AND LIFTS ETC. ARE GOING TO WORK PROPERLY WITHIN THE BUILDING THAT I LEASE SPACE?

Due diligence into building services is more commonly conducted by full floor or multi-floor occupiers in Prime buildings. That is not to say that smaller space occupiers in secondary stock shouldn’t be just as concerned about the quality of building.

The property manager assigned to a respective building will generally be well informed about building services, maintenance contracts and recent CAPEX expenditure and therefore a conversation with the property manager will often be enough for a tenant to make an informed decision.

If the Tenant requires further information the property manager may be able to pass on details of respective service contractors for the Tenant to speak with directly.

25. ONCE WE TAKE OCCUPATION OF OUR SPACE WHO DO WE CONTACT FOR BUILDING MANAGEMENT/FACILITY MANAGEMENT ISSUES?

Ask your leasing agent to provide you with the relevant contact details for the building manager and the facility manager for your chosen property. They will assist you with all building related matters and therefore we recommend that you make contact with them well in advance of your moving in date.

Not sure how much office space you need? Our calculator could help.