6 Year lease

[Murph]

Hi All,

Im looking at a commercial lease for our company and the owner through his agent is adamant on it being a 6 year lease.

Im a complete newbie with Commercial but is this normal?

Thought maybe a 2 by 2 or a 3 by 3 year term with right to renew would be more common?

Any insight would be appreciated!!



Cheers

[Davo36]

Yeah sometimes owners demand longer leases. And 6 years is not that uncommon.

But of course you don't have to take it.

If you want a shorter lease term can you go elsewhere?

[learner]

Hi Murph

Everything in a lease is negotiable, including the length of the term. I usually let tenants decide what suits them (unless it's something such as one-year). I've had small operators on two-year terms, and international tenants on 5-year terms. Six years would be preferable to me, but I let the tenant choose or we negotiate.

Choose the term you want, but bear in mind:

1. What is negotiating strength of the owner? Is it in a high-demand position, is the rent very competitive, is it a desirable building in terms of fit out and it is new, seismically strengthened etc. All these will make the owner's demand for a 6-year term stronger.

2. Your negotiating position could be stronger if the building has been vacant for a long time, and the owner may want it leased quickly.

Negotiate for the term you want. For example, if the owner wants a 6-year term, then suggest only rent reviews every three years instead of two, or ask the owner for a rent-free period of 6 months, or a fit out at the owner's cost. You don't know whether you will get something if you don't ask. In the end, you may have to walk away if it's not what you want.

Personally, my starting point is 4 years with 2-yearly rent reviews. However, I've given a two-year lease for a small start up because I wanted to help the business start and grow, and I had confidence in the operator. In another case, the tenant wanted a three-year term, so we negotiated a higher than market rent without a rent review during the term of the lease.

If you really want the premises, then negotiate something that suits both parties, otherwise look elsewhere. Good luck.

[Murph]

Ohh all good advise-Thank you!

Its in a area of high demand for sure... (Queenstown)
I wouldn't say its flash but it works for what we need!
Its not vacant and id say the owner has all the good cards!!
We are definitely a small business so might be able to play the "help the business grow card"
Maybe a 4 year lease with a two year rent review but if we needed to exit and got a new tenant the owner approved of we would not need to be a guarantor?
We would be off the hook financially etc?
We would also be doing some minor alterations... Adding some walls to secure an area in an otherwise empty warehouse space... Any other costs you reckon on top of rent, gst, outgoings?

Thank you

[learner]

Hi Murph

I don't ask for personal guarantees. If the lessee becomes bankrupt, the property owner will end up with nothing. I always ask for a bond for the duration of the lease (over $20,000 in one instance) if the lessee is an owner operator/very small company, or a bank guarantee (calculated at 3 months' rent equivalent) if a large company. This way, the risk of a loss to the property owner is minimised if the business fails. If you don't offer some sort of guarantee, then your prospect of securing a lease is reduced.

Whether your landlord will grant you a lease is highly dependent on whether the landlord likes you, what you are offering, or what your business is. In once instance, a prospective tenant was offering to pay a much higher rental than what I was asking. I refused his offer as I didn't like his business, and I preferred to leave the property vacant instead.

If you are willing to do some major fit out, then this is a plus for you in the landlord's eyes. I once had a tenant who spent well over $100,000 on a fit out (his first business venture), and to assist him, there was no rent review until the fourth year into the lease. I liked him. and wanted to give him help in the start up phase of his business.

Those are the main costs you have listed, although there may be others, if the building needs a Building Warrant of Fitness if there are certain systems installed (eg. lifts etc) that need to be certified by an Independent Qualified Person (IQP).

[PTWhatAGreatForum]

I have always refused personal gaurantees for commercial leases. While it doesn't happen often, there is ways liability could arise which extends beyond the basic leasing costs and I wanted an out if necessary.

[Murph]

Woo Hoo

Got them down from 6 years to 4 years with rental reviews every two years.

They are sticking to us being the guarantors however...

Not really willing to let us out of the lease even if we get someone to take over who they agree to etc.

I do not envision at all that we will fail as a business etc but don't really like the idea of being tied into it etc..

You guys have a lot more experience than me obviously so just tell me if Im sweating the small stuff!!

The agent is just telling me to enter into the agreement and discuss changes later if they arise, and Im telling them no negotiate first and have a set agreement then sign as we will have no rights to re negotiate after the contract is signed...

[PTWhatAGreatForum]

How shall I explain this...

How desperate are you for this?

Aim to avoid business deals done out of desperation.

Call their bluff.

Woo Hoo

Why are you so excited?

The agent is just telling me to enter into the agreement and discuss changes later if they arise,

What a load of total utter bull**** so you are right to negotiate first.

A personal friend of mine owns space in central Auckland. He will offer you a lease but I think he would let you out of it if your business were to fail because he is not a f-wit.

I suggest keep looking.

[Murph]

How shall I explain this...

How desperate are you for this?

Aim to avoid business deals done out of desperation.

Call their bluff.



Why are you so excited?



What a load of total utter bull****

Just got off the phone again and they will allow us to exit as guarantors if necessary with the only provision that any new tenant must be approved by the new owner and take over as Guarantors etc.

The property suits what we need and there is nothing readily available at all here.....

[PTWhatAGreatForum]

Just got off the phone again and they will allow us to exit as guarantors if necessary with the only provision that any new tenant must be approved by the new owner and take over as Guarantors etc.

Sounds not worth the paper it's written on.

The property suits what we need and there is nothing readily available at all here.....

Congratulations, you have just identified a single point of failure in your business. Aim to fix that.

If your business lasts until rent review time you will be shafted.

[learner]

Hi Murph

I think 4 years and two-yearly rent reviews are reasonable, and you have got them down from 6 years after they were "adamant" that it had to be six. I don't know your business or your situation, but note that:

1. You should have everything that you want put into the Agreement to Lease. That document is binding, and you may not be permitted to have variations from it.

2. My understanding is that if you are a Guarantor, then that continues, even after any assignment of the lease. See Fourth Schedule of the ADLS Deed of Lease 6th Edition. You are not released from any liabilities incurred from the non-performance of the lease by the tenant, or any successor to the original tenant. I am not a lawyer, but that is my understanding on reading that section of the lease. Consult your lawyer before signing!

MichaelNZ wrote:

A personal friend of mine owns space in central Auckland. He will offer you a lease but I think he would let you out of it if your business were to fail

Personally, I have had two tenants who could not pay the rent and had personal guarantees. Their businesses failed; one was an elderly person who had run the business successfully for at least 20 years. I didn't pursue him for rent arrears (over $30,000) as I felt that he had suffered enough already from losing his life's work, and also he was reaching retirement age. No point in making his and his wife's retirement years a misery. The other was a younger person who had worked very hard, and expanded his business by opening several new outlets. He over-extended himself and got into trouble. Once again, I didn't go after him as he had lost everything already.

Whether you will be chased up as a Guarantor will depend on the landlord, but for me, I wouldn't go chasing people. That's why now I insist on a Bank Guarantee, or a bond from my tenants.

Good luck, Murph!

[Davo36]

Murph,

1) Don't listen to anything MichaelNZ has to say on this subject. He has some sort of very small business and constantly complains about being ripped off by all and sundry.

2) 4 years with 2 year rent reviews seems reasonable to me too. But having said that we don't know what the property is, what the business is, how much the rent is etc.

3) I never, ever take on a commercial tenant without a personal guarantee. Had too many tenants do dishonest things. As a landlord, if you just have a company as the tenant, then you have nothing. Unless you do what Learner does.

4) I generally don't pursue tenants if their business doesn't work out. But if they do crooked stuff that gets them into that position, then I will.

[Murph]

Murph,

1) Don't listen to anything MichaelNZ has to say on this subject. He has some sort of very small business and constantly complains about being ripped off by all and sundry.

2) 4 years with 2 year rent reviews seems reasonable to me too. But having said that we don't know what the property is, what the business is, how much the rent is etc.

3) I never, ever take on a commercial tenant without a personal guarantee. Had too many tenants do dishonest things. As a landlord, if you just have a company as the tenant, then you have nothing. Unless you do what Learner does.

4) I generally don't pursue tenants if their business doesn't work out. But if they do crooked stuff that gets them into that position, then I will.

I did think he sounded a bit off
Im sure his comments are to generally assist.
The business has been running 4 years already and the growth is insane and contracts secure so I do not think we will fail but I like the security of moving on if necessary without having to be on the hook etc...
We are moving from a garage to a office with loads of storage which is what we now need.
Started out with 4 staff including my wife and I and now thats ballooned to 17 staff so we are growing and need the space but still the thought of being tied in frightens us... Just nerves i'm sure.

Thank you team

[Lovethiscountry]

Hi Murph,

You might try to have the landlord agree to a CPI adjusted rent review to ensure there will be no large rent increase at review time and offer to go guarantor for a maximum period of twelve months as well as been released from that obligation if you were to assign the lease.
Make sure it is all in the Agreement to Lease, as Learner advises.

Go well

[Scouser]

We don't a lot of properties for a long time but have read an awful lot of lease agreements whilst sourcing the 3 we have. Plus owned a business and leased several properties over a couple of decades. What I've seen:

- Personal guarantees are common if not the norm for smaller businesses but seems to be being replaced by bond/bank guarantees of up to 6 months lease costs. Bigger national companies will never provide personal guarantees.

- If one needs to move premises or the business folds then it's normal for the existing tenant to find a new tenant but the owner gets a refusal right if he thinks the tenant is wrong e.g. wrong type of business, likely to be too risky etc . Legally, the owner cannot refuse to do this if the tenant is reasonable (even if the lease says he can - natural justice applies) but in practise he/she can do that as it's too hard to fight. However, it's in the owner's benefit to get a new tenant if the current is folding as getting the money out of the existing tenant can be difficult no matter what is guaranteed. Note that even if the tenancy is allocated to a new party and they sign a personal guarantee as well if that fails the owner can also still come after you (told this by a lawyer) - so a personal guarantee is exactly that for the life of the tenancy but typically the guarantee then comes in behind the new tenant's guarantee.

- Most owners are very reasonable about switching over tenancies if the new tenant is decent - so if you're in an area where property is scarce it may well be in your best interests to go for the longer period as in 4 years time you may find yourself in a bidding war to stay in the property - whereas a longer period such as 3x3 still means you can walk away after 3 years but have guaranteed property for 6 years if you want it. If the property is easy to fill then the longer period is less of a risk for the tenant.

- Never ever ever ever sign the lease until you agree with all details - I have never heard of anyone changing details once the lease is signed without a fair chunk of negotiation and if the owner sells the property then the new owner is unlikely to want to fulfill any handshake agreement that is not fully documented and signed off. And do use a lawyer as some of the details can lead to unexpected liabilities.

I have both changed tenants in a property we owned and gotten new tenants to take over as tenants for a property the business we ran leased and based on my research it's reasonably common and in both cases it went smoothly but definitely has costs to exit for the tenant and none for the owner. Two may not be a big enough sample.

Being cynical as an owner - having a guarantee can be harder to enforce than one thinks if the tenant decides to be a bit of a g*t - so it's less protective than a bank guarantee or similar IMO.