Commercial Lease 3x3 Renewal

[mariner31]

Hello All,

Whats to protect the lease for a new tenant who invests a lot of money into the fitout of a commercial premise? IE If after say the 3 year lease is up and the tenant might be doing really good, could the landlord not just refuse to renew the lease or sell the property and go for a vacant possession clause? What becomes of the poor old tenant?

Regards,

Mariner.

[tricky]

I thought a 3x3 year lease would usually mean that it's up to the tenant to decide if he wants to renew and the poor landlord meekly accepts whatever the tenant decides.
It would all be spelt out in the lease agreement.
As would the rent review process which is where the landlord gets his revenge.

[Wezz]

Hi Mariner

Tricky is correct in everything mentioned. If you have a 3 "+" 3, all the control is with the tenant. It's actually to the detriment of the landlord at the plus 3 stage, as the tenant (at the "+" stage) is in full control as to whether or not they accept the + (plus 3). I say, detriment to the landlord, because at that point, he can't get rid of the tenant, unless the tenant chooses to vacate at the +3 stage. To answer your question though, the answer is for the tenant to negotiate the +'s in their lease agreement, so that the tenant has some certainty or at least the option of remaining in the space they have spent a lot of money enhancing, should they wish to do so. The other facet to negotiation, which fully answers your question, is that at point of negotiation the tenant should also negotiate "favourable" rent reviews, so that the landlord does not come in with sledgehammer rent increases, due to the expensive tenants enhancements. Some landlords will go for this and some won't, but most will try to accommodate if it suits "their" position. Keep in mind that a landlord is entitled to keep his rent at market rates, so try to be fair with the landlord when negotiating. He, like the tenant, is in business. A business that he entered with the ultimate goal of making money - just like the tenant.

Cheers - Pete.

[spurner]

Hi Mariner

Depends on the lease, but almost certainly the tenant will have the right to exercise their renewal of the lease for the additional term.

Similarly, rent reviews are undertaken in accordance with the provisions of the deed of lease.

I use the ADLS lease, and without getting too detailed - the landlord will get a (high) market rental appraisal done, and the tenant will get somebody else to do another (lower) rental appraisal and the new rent is set in the middle.

There should be a ratchet clause preventing the new rental amount from being any less than the previous rental amount, and the lease will spell out how any dispute in ascertaining the new market rent will be resolved.

So basically, read the lease.

Cheers, and good luck

Hello All,

Whats to protect the lease for a new tenant who invests a lot of money into the fitout of a commercial premise? IE If after say the 3 year lease is up and the tenant might be doing really good, could the landlord not just refuse to renew the lease or sell the property and go for a vacant possession clause? What becomes of the poor old tenant?

Regards,

Mariner.

[Glenn]

Generally the issue of selling vacant possession does not happen with commercial like it does with residential. The main value of a commercial property is the tenant and his cash flow.
It is not unkown for the tenant to have a clause in the lease about the fit out and who owns it at the end of the tenancy. I have been asked several times to buy the fittings that a departing tenant has installed. In one case the tenant called my bluff and took the sink bench forcing me to rush down to the secondhand place to find a replacement. At least the waste was still in place. That, along with the holes through the walls for it would have cost the departing tenant heaps.
For the small landlords like me I do not have enough power (money) to be totally inflexible about offering rights or renewal. One well known big name in Nelson never gives them.
The advantage of something like 3+3 is you make the rent reviews at 2 or 2.5 years so the rent reviews do not occur at the same time as the lease renewals.

So any comments to these thoughts forumites?

[Julian]

There are some good books on this topic.

The "poor old tenant" (Mariner31's description) presumably signed the lease after reading it and, in signing the contract, acknowledged that he/she had read, understood and accepted the terms. Where is the problem? It is simple contract law.

Julian