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Office Lease Renegotiation or Relocation?

Lease expiries present an opportune time for businesses to assess their office space options, review the market and use that information to either leverage a new deal on more favourable terms (within the current premises) or relocate to a new office.
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Lease expiries present an opportune time for businesses to assess their office space options, review the market and use that information to either leverage a new deal on more favourable terms (within the current premises) or relocate to a new office.

For those businesses that wish to renegotiate a new lease term for a further few years within their current tenancy, below are some helpful tips:

1. Addressing your lease expiry and commitments

Aside from staff wages, leases often represent the next biggest overhead for a business to pay. They ought to be a significant investment in staff productivity, and therefore it is better to be proactive rather than reactive when your lease is expiring.

For businesses, we recommend looking at addressing this 12 – 18 months out from your expiry.

Having a sound understanding of your lease obligations throughout and at the end of the term will mean that you are better positioned to potentially leverage a new deal.

This can be as simple as knowing your exact lease expiry, or, more intricately, understanding if you’ve got an option right (and the specifics of exercising it), and being across the details of your Make Good obligations and the costs associated with this.

2. Understanding market conditions

Once the time has come to address your office space requirements, it is within the business’s best interests to get an understanding of what the market has to offer. The most practical way a business is able to do this is by reviewing comparable options.

Even if you fully intend on renewing at your current building, it’s best to inspect a variety of options (fitted and/or unfitted) as you will form an opinion of how your tenancy stacks up in comparison to the rest of the market.

If you are unfamiliar with the market and the negotiation process – or you don’t have the time to manage this process – you might consider directly engaging a consultant who is active in the leasing market to assist. Engaging a professional will give you key insights into market trends and prevailing conditions, not only opening you up to the best opportunities, but also gearing you with the relevant knowledge required to forge a position of negotiating power. A consultant will be able to provide the necessary tools to ensure a lease process is as smooth as possible. They have the ability to keep you in the loop with comparable market deals that may assist in the decision-making process.

Like anything with a professional service provider, there will be a fee associated with this, but as a general rule of thumb, if you relocate to another building the consultant’s fees will be paid by the successful Landlord. If you renew within your current building, your business will be liable for a fee with the consultant.

By reviewing the market, word will get back to your existing Landlord/Asset Manager that you’re in the market, which may ultimately assist in building leverage to create a better deal. 

3. Creating Leverage and requesting offers

Once you have done your due diligence and explored all suitable options in the CBD it is the time to request offers at some shortlisted options/your own building (if not already done).

From here you will need to rely on the market expertise you have gained and use this to create a leveraged position in your negotiations. Most landlords would prefer to retain their existing tenants as the prospect of losing them may bring about more than just a loss in rent, including issues such as prolonged vacancy, make good costs, agency and legal fees, and a likely reality that they will need to provide a full incentive to a new tenant. This fact means that if your current landlord sees you as a serious threat to vacate, they will be more likely to put their best deal terms forward and retain you as an occupier.

As a baseline you will want to achieve the best rent and incentive per the market standards. However, there are some other points to be conscious of that may assist in savings for the business, these are:

  • Reduced annual increases
  • Reduced Bank Guarantee
  • Renegotiation of Make Good
  • Extra Lessor works (only needed if your tenancy needs to be tweaked)
  • Bringing forward of the business’s new lease start date, prior to your current expiry date so the business is able to realise the reduced rental rate sooner.

Each Landlord is different in how they approach offers. Some will come out with an aggressive offer, leaving only a small amount of room for negotiation, whereas others will offer an initial position where they leave plenty of gas in the tank. As long as you use a well-researched, evidenced approach it will not matter the method, the outcome will likely be the same.

As you get to the point that the negotiating is done and all cards are on the table, it is worth considering a few smaller points. Although a deal may be better elsewhere, there is a certain price that a business is unable to put on the intangibles of staying in your existing building, things like:

  • Good Property Management and Good building services;
    • As an example, if there is an air-con issue a Property Manager/Facilities Manager who takes the best part of a day to respond can be an absolute nightmare for your business.
  • Moving costs;
    • This can include general business downtime associated in moving offices, as well as;
    • The addition of hiring removalists to relocate any furniture.
  • Consulting fees;
    • This is only applicable if the business employs an external consultant to renegotiate an existing lease.
  • Legal costs;
    • This will vary depending on who your solicitor is and how long your lease is.
  • Cabling to the tenancy/additional fit out works;
    • Even in a fitted space Cabling (power and data) is often a cost that is borne by the tenant and must be factored in to your decision.
  • Good staff amenity;
    • Facilities like a good quality End of Trip or a Business Hub, as well as areas to meet with clients within your existing building, are things that cannot necessarily be justified quantifiably and, just because a deal may be cheaper does not mean that the reduced overheads account for the loss of amenity.

 

Ultimately, although the process may be tedious at times, the potential to greatly reduce overheads cannot be understated and is well worth the time input when considering to renegotiate your office lease.