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Tenants don’t get what they deserve, they get what they negotiate

July 17, 2014

This article focuses on the importance of commercial leasing proposals (also called “heads of terms” or “heads of agreement”).   The take-away points for tenants are:

  1. Tenants have the strongest negotiating position at the leasing proposal stage before the lease is issued.
  1. Tenants should take advice from a lawyer or an independent leasing agent (not the landlord’s agent) before signing a leasing proposal or heads of terms to take a lease.
  1. Tenants should do their homework and research current market rentals on the internet or ask an independent leasing agent (but not the landlord’s agent) on current rentals and lease incentives achievable in the market. Agents often publish market research on their websites.

Sounds like common-sense? In our experience most small or medium sized businesses do nothing of the sort. They negotiate the leasing proposal themselves and risk paying more than they have to for a lease for two reasons:

  1. Most, if not all, of the major cost items are decided in the leasing proposal such as rent, outgoings, lease incentives, fitout, repairs, upgrades or capital works, make good and lease security.
  1. Landlords and their agents are in the business of leasing property; tenants are not. So who do you think comes off better in the negotiations?

Occasionally, leasing proposals can be legally binding and even if they are not it may be commercially difficult to resile from them. If the tenant makes a mistake or misses something out then the landlord will resist the tenant’s attempts to set things right in the lease when it impacts on the landlord’s bottom line.

Some of this is due to the vested interests of the landlord’s agent or lawyers. From the agent’s point of view, the deal has been done and the sooner the lease is signed, the sooner they get paid. The landlord’s lawyers view their role as minimising changes to the lease they have drafted.

So the landlord (or their agent or lawyer) will say something like,

This is our standard form lease. If you wanted these changes to the lease then you should have negotiated for them in the leasing proposal.  A deal is a deal and now it is too late.”

Most likely, the tenant will have paid a holding deposit on terms that the landlord will have the right to deduct its legal costs in relation to the preparation of the lease from the deposit before refunding the balance if the tenant pulls out after the lease has been issued.

It’s unfair but in business you don’t get what you deserve, you get what you negotiate.

It is even harder for tenants of premises in large multi-let buildings owned by institutional landlords such as listed property trusts or super funds where a hierarchical decision-making process reduces the landlord’s flexibility in agreeing to changes to the lease, you are just one tenant among many and the landlord gains substantial cost savings in lease administration if all the leases are more or less identical (other than the rent payable and the lease duration).

All of this means that tenants enjoy the strongest negotiating position at the leasing proposal stage before they make any commitment and that is when they should seek legal and rental advice.

One last point, a good leasing proposal or heads of terms should always state that the parties do not intend the leasing proposal to create legally binding relations between the landlord and tenant and that any agreement is subject to a deed of lease being signed by both parties.  Otherwise, the parties may find they are bound by the terms of the leasing proposal even if a lease is never signed. There may be circumstances in which that outcome is strategically desirable depending on what the proposal states. Legal advice should always be sought on this point.

Andrew Kleiman, Legal Practitioner Director

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