As businesses navigate living in a world with Covid-19 commercial tenants should be asking some questions about their lease and taking proactive steps.
Right now is a good time to ask:
What does the leasing landscape look like?
Where might there be advantages in negotiating lease terms?
What are the functions of a Heads of Agreement?
Shift in working style
Many will have heard or read reports about increased vacancy rates for commercial office premises in CBD and metropolitan areas since Covid-19 came upon us, which in part emanates from a growing number of staff and the public service working remotely from home, whether full-time, part time, flexibly, or in a hybrid manner. At the time of writing, latest Property Council of Australia’s figures show that the daily occupancy rate in Sydney is just over 50% and in Melbourne, it is around 40%. This remains a stark contrast to published pre Covid-19 levels of 94% for both Sydney and Melbourne.
The emergence of Covid-19 and its lockdowns was indeed a powerful instigator for that shift in working style, although many businesses and organisations were pro-actively exploring and implementing work from home policies prior to the Covid-19 pandemic. The shift in working style looks to be semi-permanent if not permanent. With that in mind, the impact of the shift could mean overall tenancy demand decreases and increased vacancy rates stay around.
New office projects
In conjunction with lower occupancy levels, there is expected to be a projected supply increase of new office developments in Sydney, Melbourne and other areas in the next few years, increasing the competition to attract tenants.
With the increasing call for sustainable built environments in a bid to reduce carbon emissions, if these new premises fit the bill, it could be an attractive incentive for businesses. The new Atlassian building near Central Station in Sydney is at the forefront for this type of building. A number of buildings have worked for some years now to establish sustainability and green lease initiatives, which will start to be expected in buildings in key capital cities over the coming years.
Why now could prove a good time to renegotiate your lease
With Covid-19 lockdowns hopefully in the past, and businesses having a better overview of what hybrid means for their business, taking the time to assess your commercial lease now could well be worth the effort. If your business is considering new leased premises or is in the market for same, it seems you would have a good mix of ingredients to explore your leasing options with some negotiating factors on your side.
Some common incentives you could negotiate are:
an attractive rent with fixed increases;
a rent incentive (effectively discounted rent amortised over the term of the lease);
a works incentive where the landlord agrees to undertake improvements to the premises at their cost or contribute to your fit out works;
a rent-free period.
You may be better placed to negotiate away from more typical requirements such as director (personal) guarantees in order to reduce risk and exposure.
Heads of Agreement
When lease terms have been negotiated and are agreed, they are set out in a Heads of Agreement (also known as a leasing advice). It is typically signed by both the landlord and the tenant and is the basis to prepare the initial draft lease.
This agreement contains essential information such as the rent sum, methods of rent review, length of term and any options to renew, whether outgoings are payable, sum/type of bond, permitted use and any incentives that have been negotiated.
Heads of Agreement can also refer to other terms that may have been negotiated between the parties or that otherwise are a landlord stipulation (whether specific to the landlord in question or general, or industry standard). They can vary in detail and in some cases, depending on the premises, the more detail the better.
As an example: a Heads of Agreement which is silent on make good obligations when a tenant vacates the premises or is simplistic with respect to those obligations may not be helpful for certain premises where fit out already exists or where a landlord and tenant both contribute to fit out.
It is sensible to obtain legal advice when negotiating or renegotiating the terms of your lease. Some terms are ultimately commercial but a number of terms if properly considered can be fleshed out with the landlord or their agent at the time of negotiations and correctly worded, to avoid any misunderstanding, inefficiency or disagreement when the lease is prepared and is then reviewed.
The current leasing landscape provides a good opportunity for commercial tenants to consider new lease arrangements and to attempt to negotiate new lease terms favourably.
Heads of Agreement are important and useful documents, that cover the agreed commercial terms and set the tone for lease preparation and negotiation on lease terms.
A lease is one of the most costly components of any business. If not reviewed by an expert, a tenant can be locked into terms that increase their risks and compromise their rights.