6 min read
Tenants regularly respond to landlord demands without actively reviewing the claims being made. Then, when suddenly confronted with an obvious landlord ‘try-on’, they react with surprise and dismay at the audacity of the landlord. It probably makes sense to start by stating a few obvious observations about landlords. Although these observations are generalisations, if tenants consider these as the starting point in the relationship, they are less likely to be disappointed.
Firstly, very few landlords treat their tenants as customers– particularly once the lease has been signed and the rental commitment is secured for the medium-to-long term. Commercial property investment and management is a strange industry – there is very little focus on customers – so do not expect to receive any flowers or favours.
Next it is important to understand the very short-term focus of landlords, particularly once the leasing deal has been done. Based on investor demands, often the key focus of landlords is maximising net income for the next reporting period – often without due consideration of longer-term consequences. The financial pressures of listed property companies and investment funds based on promises made to their investors and having to report on a quarterly basis can be significant, particularly with expectations of continued ever-upward trends in revenues. Private landlords also have pressures, continually having to respond to the scrutiny of the banks. With these pressures it is understandable that landlords focus all their attention on short revenues and, dare we say, tricks to maximise short-term revenues to the detriment of longer-term relationships with their tenants.
In addition, other than in retail premises, the fragmented nature of property investment and ownership, particularly at the smaller end of the property spectrum, means there is limited scope for landlords to lease premises to tenants at multiple locations. Hence, these types of landlords will view their tenants as ‘once-off’ business associates, rather than customers that need to be nurtured so as to be able to make multiple sales.
Based on this background, what can tenants do? To start off,remember the scout’s motto: Be prepared! This preparation has a number of elements to it. But this should start at the very beginning – the lease negotiation and documentation. Do not get pressured into accepting landlord‘standard’ lease provisions without fully understanding the implications. Then you can make the decision to either negotiate these provisions out of the lease while you have the leverage, or accept the lease term idiosyncrasies and not be surprised by landlord actions based on these terms. Too often, lease term details are concluded between solicitors without the presence of the key negotiators, who may not understand the nuances of the commercial terms. Often,some of the more tedious lease term details get forgotten – only upon occupation do the advantages or disadvantages of these terms tend to be manifest.
Next, you need to have an ongoing understanding of the lease critical dates for the entire leased portfolio. The leased portfolio management process and system should have reminder dates – for rent reviews, lease terminations, options, earliest and latest dates to serve or respond to notices, etc – that are automatically generated with actions and responsibilities clearly allocated. These reminder dates may not be limited to the actual dates contained in the lease agreements, but should include earlier dates if relevant for planning and taking appropriate actions to support the decision points.
Finally, you need to manage your landlords proactively, not just reactively as issues arise. Be mindful of the potential tricks and tactics that landlords may adopt to maximise their short-term net cashflow, such as inflated out-going recoveries, rent notices being issued over the December holiday period, fixed and CPI-based increases being calculated from the incorrect base date, ‘double-dipping’ on maintenance costs, etc.
Ideally, the best approach to landlord management is attempting to build a positive but firm relationship of open communication,preferably not through a management agent (if this can be avoided). Use the concept of ‘tough love’. Make sure you love your landlord – though this may be difficult – but make sure lease term manipulations or exploitations of ambiguities are rejected. This proactive landlord management should start at the lease commencement date and be maintained throughout the lease term. Make your landlord accept your status as a customer and understand that you expect to be treated as such. Rental or outgoing recovery accounting ‘mistakes’ need to be identified and rejected immediately. Issues related to building services performance should be reported and the landlord’s rectification effort monitored firmly. Service requests and responses should be managed diligently.Do not let your landlord become complacent. Show no leniency or let-up. Accept that some landlords will attempt anything that is going to save money to show short-term investment performance. Remember that this may even be your landlord’s business mantra.
On a more positive note, it is often advantageous to have an understanding of your landlord’s business, particularly as this relates to larger leases. What are the business pressures that may be in your landlord’s world? What can you do to improve the relationship? This is often based on identifying the synergies between your landlord’s priorities and your priorities and coming up with solutions that work for both parties. How does your lease affect the landlord’s portfolio? A major lease extension may make a significant difference to the portfolio’s Weighted Average Lease Expiry profile – and achieve are-rating for the investment fund. In response, an offer to extend a lease term may be offset against handing back a floor or two of excess space. Or be balanced with a rental reduction. Or be traded off against improved building performance or refurbishment commitments from the landlord.
The foundation of leased portfolio performance based on landlord management is set during the courting stages. Getting lease term concessions is always easier to achieve prior to committing to the lease arrangements, compared to attempting to get improvements during the lease term when there is no negotiating leverage. During new lease negotiations do not be afraid to ask questions. Often prospective tenants do not ask for options,performance standard guarantees or even tenant remedies because it is assumed that landlords will not agree. The key message is to push the boundaries where they matter – without being totally unreasonable – and see how the prospective landlords on the shortlist respond. If necessary, there will be an opportunity to back down later. But maintain your negotiating integrity – don’t fall into the trap of conceding too quickly. Make sure that the landlords do not identify your negotiating concession points.
Landlords are experts at negotiations and will ‘try on’ all sorts of clauses that are not germane. These are the points that the landlord will concede in the heat of the negotiations, but which do not really affect their position. The challenge is to be able to identify these points and not accept them as ‘real’ concessions. The most important strategy is to maintain the negotiating leverage – until the very end of the deal making. As soon as the landlord identifies that there is no real commitment to move to any other premises or locations, your negotiating leverage will be destroyed. The key to successful negotiations is to always have one – or preferably two – viable alternative accommodation options.
But be mindful that you may be forced to move to one of these if the negotiations in your primary target premises prove unsuccessful.
Property Beyond can provide specialist advice with regard to negotiating leases, interpreting leases and lease disputes. If you are a tenant seeking to minimise risk and cost then please contact Property Beyond on 02 8094 1999.
