All things must come to an end, and lease expiries are an inevitable part of renting commercial property.
Currently the changing shape of our cities, a trend towards shorter lease durations, as well as other developments affecting the workplace, make lease end events a common occurrence. For a landlord these periods can be expensive, with an increase in outgoings and a drop in income from rent. There is also the uncertainty of how long the void period will last, with average durations varying from a few months, to over a year depending on property type and location.
Where a property has been poorly maintained, or subject to significant damage by the tenant, then refurbishment is likely to be required to maintain the property value and secure a new tenant. Under the reinstatement provisions within the lease some of these works are likely to be the responsibility of the outgoing tenant. From a tenant’s perspective, there is often uncertainty around the reinstatement and ‘make good’ clauses in the lease. Negotiations to resolve these can become drawn out, and may involve a significant financial settlement that has not been properly budgeted for as part of the relocation. The bad news is the cost of reinstatement arises from the original lease terms and the way the building has been maintained throughout the occupation. To some degree it is not possible to avoid the obligations at the end of the lease, but that is not to say the process cannot be managed to minimise the impact on both parties.
Both the landlord and tenant should be starting to think about their lease end events well in advance. For a small retail unit this might be 6 months before, or for a large manufacturing plant it might be several years.
Read the Lease
Although the condition of the building and the expectations of incoming tenants may have an impact, the reinstatement obligations arise as a result of the lease terms.
Keep the Lines Open
At an early stage it is worth speaking to the other party to understand their intentions, normally some obligations are more important than others.
Play to Your Strengths
Take a realistic view of the strengths of both parties. A large corporate tenant is possibly in a better position to obtain best value and carry out works than a mum and dad landlord.
Under most leases a landlord cannot expect a brand new building back, likewise a tenant shouldn’t expect to be able to just hand over the keys. Some acceptance by both parties of the terms that they agreed to at the beginning goes a long way.
It is also worth noting that the lessons learned from a lease expiry should not be repeated in the future. Where you are dealing with regular lease expires across a portfolio of properties it is important to pay as much attention to the exit provisions as the rent, rights to renew and incentives on offer.