Negotiating Commercial Property Lease - What Should I Look out for?

stickyfingers on 03/08/2016 - 23:04
Last edited 03/08/2016 - 23:05

I'm looking to start an electronics store around my town and after doing my research have found a shop space which is just right. It's great price wise, location wise, etc.
The space has been vacant for around 1.5 - 2 years now with an electronics store previously operating there.

When going to book an inspection I was told that somebody else was going to view the space at the same time as requested so I booked my inspection straight after them for the next day.
During my inspection (which was with a different person to who I booked the inspection with) the agent also noted that somebody else had been looking at the space earlier. Less than 24 hours later, I received a call from the agent saying that the other person interested in the space had put in a letter of intent and they recommended I also submit one as soon as possible.

This concerns me for a few reasons:

  • Is there actually somebody else looking at the space or is this a tactic to push me into taking up the space?

  • Should I limit my negotiation with the space?

  • I'm only looking to start out with a 1-year lease. If somebody else does want the space, what can I do to be more favorable?

Any tips or advice on what to do and also what to negotiate will be extremely helpful!

Financial

Comments

  • airzone on 03/08/2016 - 23:41
    +7

    The space has been vacant for around 1.5 - 2 years now

    somebody else was going to view the space at the same time as requested

    Convenient.

    • stickyfingers on 04/08/2016 - 00:38

      Exactly why I'm so suspicious of this. The agent has frequently asked me when I'd be ready to put in a letter of intent and move in.

      I don't want to miss out on this space, but I also don't want to be stupid and waste money I could save.

      • KaTst3R on 04/08/2016 - 02:33
        +3

        The more desperate the agent is the more leverage you have over them. So take your time to decide knowing that the ball is in your court. The place is vacant for the last 2 years, they owner will probably accept any reasonable offer you give him.

        • stickyfingers on 04/08/2016 - 03:40

          Great to know. The place is currently around $18000/y (including GST), excluding outgoings (around $2k/y). How would you say to negotiate something like that?

        • KaTst3R on 04/08/2016 - 16:21
          +1

          @stickyfingers:

          Maybe ask the shops around how much they are paying. No harm striking a friendly conversation. They wont mind telling you unless they are in the same sort of business. If you are interested, just test the water how much they can accept, maybe start with $13k or $14k per year and work upwards. If $18,000 is the asking price, it means they have space to go downwards a little. If you want to survive in business, you have to start learning how to negotiate.

          Edit: I read mskeggs' comments. A sensible thing to do is also get legal advice for help.

        • stickyfingers on 04/08/2016 - 17:47

          @KaTst3R: Thanks for your help everyone! I actually went and had a chat with a friend who owns a real estate around here who helped me with negotiation, term conditions etc.

          I'll update here when I hear more!

  • KaTst3R on 04/08/2016 - 02:26
    +2

    One tactic in sales is to create a sense of urgency. So it is exactly what the agent is doing, i.e. someone is looking at space….called you in less than 24 hrs…put in letter of intent now or forever lose this golden opportunity..etc. If there is really a competitor, owner will wait for both of you to put in the offer before deciding. Dont forget, owner also wants the best price for his place so he will wait.

  • mskeggs on 04/08/2016 - 07:25
    +2

    I think the competitive offer is suspect too.
    In this situation I would be seeking a rent-free period at the start (maybe 1 month for each year of the lease you will commit to).
    Another item is whether the owner will contribute funds to a fit out. If you were going to spend, say $3k on new lighting, that might be something the owner would contribute to as they would retain the that benefit longer term.
    My other caution would be to think hard about the lease term. What happens if you are a success and you want to stay? Even with options for extensions, at the end of 3 years you will be at the mercy of the landlord to set the rent whatever they like.
    Not a huge deal if there are lots of vacant shops in the area (but if so, why are they all vacant!) but it might pay to try for an initial term of 1yr plus 3yr +3yr options (or 5y +5y).
    There is a book I have skimmed on this:
    https://store.kobobooks.com/en-us/ebook/the-retailer-s-guide…

    It isn't as good as it could be, seemingly focussed on shopping centres, but for under $10 it might easily prompt ideas you wouldn't have had without it.
    It is also likely there are some protections in law for small retailers (there are in NSW and VIC, not sure about QLD) which are the minimum terms for your lease. This will likely also spell out what the agent/landlord has to supply to you in terms of the offer. Google small retailer lease QLD or something similar.

    My lawyer friend who does commercial leases all day says "don't put anything in writing yet!" but he is a cautious lawyer used to being screwed by Westfield. In a private landlord situation things are a bit more informal. In any case, I would be getting a copy of the lease before submitting any sort of application. Getting your own legal advice would likely cost only a few hundred dollars, and can give you a list of bargaining chips as they pick up little things in the lease that you can "trade off" against the concessions on rent etc.

    My last thought is that commercial landlords in Australia seem a strange bunch. They will often rather a site be vacant than drop the rent, so don't expect economic reality to necessarily work in your discussions.

  • Typical16-bitEnjoyer on 05/08/2016 - 08:11

    You should really seek legal advice.

    My biggest Tip, if you haven't already, set up the business under a Pty Ltd and have the Pty Ltd as the tenant. Do not be a personal guarantor.

    Read the lease, especially any special clauses, very carefully. Avoid agreeing to any clauses requiring a bank guarantee.

    I didn't see which state you were in but you may need to sign a waiver if the lease is under 5 years.

    • mskeggs on 05/08/2016 - 08:43

      This advice isn't very realistic.
      While you should set up a limited liability company for other reasons, attempting to use it as a shell to enter the lease will almost certainly fail. Only the most desperate or poorly advised landlord will let a start up business enter a lease without a guarantee - personal if you have some other assets, bank if you don't.
      I'll assume this comment was written by a law student (or law professor!) as it gives recommendations that are not viable in the real world. I think it is a good idea to seek legal advice as a good lawyer will give you information to negotiate, and will explain what your obligations are (e.g. if you give a guarantee, you will be on the hook for the rent, even if the business fails) but realise that opening a business has a bunch of risks associated, and there are many you will need to accept if you want to trade.

      • Typical16-bitEnjoyer on 05/08/2016 - 12:26

        I work in an area involving commercial leasing.

        The smart cookies do similar to what I suggested. Minimises risk. Setting up a $2 Pty Ltd is easy as pie.

        Retail businesses, especially small ones, fail all the time. Don't want to lose your house or future over it.

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