Category Archives: Commercial

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4 key considerations for a Commercial Lease Bank Guarantee

By | Commercial | No Comments

A Bank Guarantee is a form of security that a Tenant provides to a Landlord to give surety that the Tenant will perform to their obligations under the Lease. The terms of a Bank Guarantee can often be overlooked during the negotiation of a Commercial Lease as usually the main focus is on the rent and in most situations rightly so but is there any point in having the highest rent per square metre in the street if your Tenant does not pay the rent and they default in substantial arrears with an insufficient, or even worse, no or an invalid security deposit to lean upon?

We take a look at some items to consider when negotiating and obtaining the Bank Guarantee –

Amount
It is important to have appropriate cover if the Tenant was to default and vacate leaving you with an arrears shortfall and potentially a significant make good. Circumstances may call for a 6 to 12-month rent plus outgoings plus GST equivalent if the Tenants finances or its make good obligations are of concern. If a net Lease, it is wise to include outgoings charges into the calculation as often if a tenant does not pay its rent, they typically do not pay their outgoings also. Further make sure that as rent increases, the amount of the bank guarantee increases also as the rent equivalent amount for the first and last year of a 10 or 20-year lease can obviously be quite different.

Expiry
The expiry of the Bank Guarantee can be critical to ensure that the Bank Guarantee can be called upon at the right time. For example, if a Tenant has a 5-year Lease term and the Bank Guarantee expires on the same day as the Lease term ends, if the Tenant promises to make good during the last week of the term of the Lease yet fails to do so to an appropriate standard you will not be able to cash in the Bank Guarantee after its expiry. Depending on the agreed dates to update the Bank Guarantee, minimum 6 months after the term ends is a fair date for the Bank Guarantee to expire.

Particulars
Always ensure that the details in the Bank Guarantee are correct including but not limited to property address, amounts and Landlord details. If something is incorrect, it could invalidate/cause problems when cashing it in.

Make sure its original
If you receive a copy of the Bank Guarantee and if for whatever reason the Tenant has the original, they could cancel the Bank Guarantee making your copy worthless!

We hope you found the above of value and please do not hesitate to contact us should you wish to discuss management of your prized asset.

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Net or Gross Rent for a Commercial Lease?

By | Commercial | No Comments

Many Landlords are faced with a choice when negotiating a Commercial Lease; to have the rent paid on a Gross or Net basis.

A Net Lease means that the Tenant pays rent in addition to the outgoings, a gross Lease is when the outgoings are included in the rent.

With a Gross Lease the total payable amount of outgoings is negotiated into the rent, for example, if the Landlord wanted a rent of $90,000 per year and the outgoings were $10,000, in theory the rent negotiated will likely be $100,000. Some see this as being “cleaner” as the Tenant simply pays rent to the Landlord, and the Landlord or their agent pays the outgoings. They consider that easier to manage and in a lot of respects that is true. But consider that the annual increases for the property were 3%, but after the first-year outgoings such as Council Rates and Water Rates increased by 4% and say insurance increased by 8% (which depending on the circumstance can sometimes happen), the Landlord is losing out a few hundred dollars. This loss is compounded on a yearly basis if similar increases occur.

On a Net Lease, the Tenant is liable for the outgoings payments and any reasonable increase in cost is payable by them. However, if for whatever reason the outgoings remain the same or less than the increases in your Lease, you lose out on the increase in outgoings you would have enjoyed on a Gross Lease.

Typically, whilst outgoings are unpredictable, they almost always go up and in the minimum range of 3-4% but from time to time skew much higher. Although councils in Victoria, due to government intervention, are capping their increases, land valuations (and in some circumstances rates charges) are increasing so this is still compounding higher. Tenants are usually reluctant to enter into a Gross Lease paying the full rent and outgoings total being asked, they try to negotiate. There are circumstances where Gross Leases can be favourable almost regardless of outgoings increases and this occurs when higher annual rent increases are involved or if you have negotiated a higher starting rent.

If you are in the lucky position of being able to claim Land Tax from the Tenant, this may change your strategy yet again.

Contact us to discuss your circumstance and how we can assist you in making the right choice, Gross or Net Lease?

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Three things to consider (other than rent) when entering into a commercial lease with your Tenant

By | Commercial | No Comments
We delve into what Landlords should consider when entering into a commercial lease with a Tenant (other than rent)
Tenant
This one is obvious however the type of Tenant you Lease your property to can affect the rent achieved and even the potential sale price should you consider to sell. Demand for strong listed companies (or their subsidiaries) is very high, a building with a Bunnings for example is hot property. Is your Tenant a seasoned operator? Do they understand how to run a successful business and will they be long term? How do they want to structure their company and how does this affect you if they do not meet the requirements of the Lease or default? If you are uncertain on the Tenant but you still want to give them a go, it is important to mitigate your exposure by having guarantees or increased security deposits for example.
Lease Term and options
This depends on your strategy and the type of property, is a sale on the horizon, is it a long term family asset etc? The strategy of a long lease may not always be the best solution especially if you do not account appropriate rent reviews, or say for the example of a shopping centre if the presentation of the Tenant is low and this brings down the perception of quality for the rest of the Tenants. Allowing an appropriate length of Lease allows you to control your property which can be critical.
Rent reviews
Keeping rent at or above market levels is one of the basics of a having an investment. No one wants an underperforming asset and one way a property underperforms is by not allowing for high enough rent reviews. The amount of rent review varies from property to property, as does when to allow for market reviews. For example an outer suburban property would not command as high an annual rent review as most comparable city properties. However if you have negotiated a higher annual review than market, you would not want to allow for an early market review as it would be unlikely that the market rent would be higher than your rent with increases, assuming your initial rent was at or above market.
The above gives you a glimpse of the intricacies of a commercial lease and what a Landlord should consider when renting. Please feel free to contact our office should you wish to discuss further.