Selecting a Good Retail Leasing Expert

When you run a retail real estate agency specialising in retail leasing and property management, you really need a top agent that knows what retail property is all about.  The leasing of retail is very special; far more so than office or industrial property.  The selection of tenants will be made with due regard to the tenancy mix and the customer profiles that access the property.

It can take a leasing agent some years to fully understand the complexity of shopping centre performance and how tenants should be selected for a current or pending vacancy in the property.  The correct tenant selection will help boost the customer attraction of the property, and eventually the turnover or trade.

So what would you expect a retail leasing specialist to know or bring to you and your agency?  Here are some tips to help you:

  • Rents will vary from property to property.  This change requires knowledge and experience when it comes to gross and net rents, together with the incentives that are available to lease premises to new retail tenants in your local area.
  • Lease types together with the terms and conditions for a particular tenant will require negotiation based on the local leasing laws relating to retail property.  In many respects, retail leasing is more complex and the documentation behind the process is more rigid and
  • Tenant enquiry will change from location to location, however in retail property it is very much the case that the leasing agent has to get out into the business community and the other local shopping centres to talk to the existing tenants.  In this way they will find tenants that want to relocate, expand, or contract.  It is important to choose tenants that are at the top of their product or service offering.
  • New shopping centre projects and development timing will have impact on your current shopping centre and its future performance.  Always watch the supply and demand for retail space locally.  Any new leasing specialist should track these changes and the availability of retail space coming into the property market over the coming 2 years.
  • Property owners and new tenants that are looking for retail property are a unique breed unto themselves.  They require understanding and a leasing expert that can talk ‘retail’ from many different angles.
  • Franchise groups will require retail space to locate new businesses into.  That being said, franchises are a business model that has particular requirements of location and customer base.  It pays to have a leasing expert that understands how the franchises think and what they are looking for.
  • Outgoings costs will have a major impact on rental (gross and net) as well as a tenants occupancy costs.  Every retail property will have outgoings of a level that allows the property to operate efficiently and safely.  The important factor here is that the outgoings for a particular property should be of a level that is comparable to other properties locally of similar size and type.
  • Tenant mix and clustering are knowledge skills needed by a retail leasing expert.  When the tenant mix is correctly structured it builds a better market rental for the landlord and helps reduce the vacancy factor in the property.
  • Document knowledge and negotiation skills in retail property are quite unique when it comes to handling and working with small businesses.  A leasing expert should understand what variables can be used in a good lease negotiation for a shopping centre or retail property.

So, all of these things would indicate that a retail leasing expert is a special type of person.  Over time these skills can be learned; importantly the person chosen for the role has the right skill mix to take the role to the top of the industry locally.

Common Sense Tenancy Mix Analysis in Retail Property

In a retail property today, the tenant mix is likely to be the ‘make or break’ factor in property performance.  A good tenant mix will help the property thrive and underpin the rentals for the property and the landlord.

So how can you get to know what works?  It is easy to see examples of tenant mix profiles in other properties and then compare them to your property.  Look for the situations that work and those that do not.

Clustering is one factor worth examining in other properties to see how they may handle the cluster concepts.  Whilst you are there, look at their vacancy factors and just how they work with them.

Competing properties will also have factors of tenant loss and relocation; that is a good source of new tenants for your property.

Here are some other tips that can help you in your tenant mix design and property business plan.

  1. Understand the local demographic of customers before you do anything else.  Are there changes in the local area that will impact the customer base now or in the next couple of years?  If so the factors will need to be in your business plan for the property. The business plan should be done every 12 months and reviewed quarterly.
  2. Undertake a customer survey in your property and in the surrounding area.  You will learn so many key things from that process.  Why do people shop in your property?  What would they like to see changed and why?  How often do people come to your property and on what days?
  3. Check out the existing competing properties in the local area.  In this way you will see the differences that their customers see.  Pay particular attention to the access and convenience factors with those properties before you look at the tenant mix internally.  If there is one thing that frustrates many shoppers it is access and convenience.  Can your retail property improve on anything that the other properties are struggling with?
  4. The maintenance of your property will be driven by property layout, customer visits, and building age. Retail property is one of the most costly property types to maintain.  That is why outgoings in retail are so high.
  5. The anchor tenant or tenants in your property are likely to be established on a long lease(s) with appropriate rent reviews.    The anchor tenant profile will help you lease the specialty tenant premises in the property.  Create sound relations with your anchor tenants so the customer targets that they have integrate to the overall marketing plan for the property overall and the general tenant mix.

A great retail property performance is a constantly moving target.  Over time you will be modifying your plans and strategies when new things are seen or the local area changes.  Get involved with the local retail businesses and shopping community; you will soon know what they are looking for.

Leasing Tips and Handover Strategies

When it comes to leasing a commercial or retail property, you will find that there are special things that should happen to keep control of the transaction and the final stages of property handover.  Eagerness produces errors and omissions from a leasing perspective.

The simple fact of the matter is that control helps us get the parties to the lease ‘across the line’.  For that very reason it pays to have a checklist approach to the leasing process and property handover.

When you get a lease negotiation underway, so many things can come into the transaction and divert the discussions and agreements.  Very commonly in the involvement of solicitors on behalf of the parties to the lease you will see that slow-down process start.

You are working for the client and they want a timely lease that is correctly executed and implemented. Always stay with the negotiation and the lease momentum to the very end.  If a solicitor has the papers on behalf of a client, chase-up the situation and see where things can go next.

Here is a checklist for the leasing of premises; it features some of the main things that are really important in leasing and a timely outcome.  You can add to the list based on your property type, and location.

  1. The correct lease documents should be prepared with accurate regard for the facts from the original lease negotiation.  Ensure that the client’s solicitor understands all of the facts and the unique elements of the property.
  2. Some lease documents are just part of the required paperwork for the lease occupancy.  At times there are other papers such as fit out agreements, disclosures, licences, and side agreements.  All of these should be correctly signed and in the order that is relative to local property laws and leasing situations.
  3. Any incentive agreements between the parties should be correctly documented and signed.
  4. Any plans and drawings that are part of the leasing agreement should be sourced and available for approvals.
  5. Any consultant reports relating to the transaction should be sourced.  Typically they are mechanical, electrical, structural, and base building.
  6. The permitted use for the premises should be clearly set and agreed between the parties.  That use will have impact on the design of the premises.
  7. Landlord approvals may be required before any building approvals are sought from the building and construction board or office.
  8. All monies to be paid under the lease should be taken at the time of handing over of all lease documents from the tenant.  Those monies should include bonds, guarantees, fit out contributions, and any other important financial commitments from the lease document.
  9. Do not under any circumstances hand over the keys to the premises until the landlord and their legal advisor have indicated that all papers and monies are correct and in order with both parties.  Importantly those documents should be signed by both parties.
  10. Document the condition of the premises before the tenant takes over.  This will be an important fact of record when it comes to the end of the lease.

When you create a lease handover checklist, you can keep the transaction on track to finality.  That then means a happy client and a good commission.

Leasing Factors in Retail Property Today

When you lease a retail property or promote a vacancy to be leased, there is a fair bit of information to be sourced and set as part of the vacancy marketing effort.  When you are fully informed and prepared, the retail leasing situation is much easier and more direct.

A retail tenant will ask lots of questions.  They have a business to run and they need to know that the property can support their intended operations, marketing efforts, and trade.

The landlord that owns the retail property will have a lot to do with the overall success of the tenant mix and the levels of sales.  Inexperienced retail landlords can destroy a tenant mix and retail property performance if they do not devote the correct focus on balancing key relationships.

Owning a retail property is a special process.  The fine balance between the tenants, customers, property manager, and landlord should be protected and encouraged.

Some of the critical leasing factors in a retail property or shopping centre will include:

  1. Levels of rental to be charged should be fair and reasonable in keeping with the existing and prevailing market rents.   Far too many landlords set rent based on their need to finance the property or boost the property value.  An aggressive rent can ‘kill’ the tenant mix faster than you would expect.
  2. Types of rental will change from property to property but will include gross rent, net rent, and incentives.   All of these rent issues require decisions based on existing market trends.  Rental targets for the property should be set in the business plan for the property and be reviewed annually.
  3. Tenancy space details will include area of the premises and configuration.   Be careful in setting rent with narrow, long, and deep premises.  When it comes to retail rental, it is the ‘frontage’ of the premises that sets the rent and sustains the customer interest.
  4. Permitted use for the premises will be set based on the requirements of occupancy and the prevailing tenant mix.  Decide what types of tenants you really want for the vacant premises.  How will they balance the offering of adjacent and nearby tenants?
  5. Existing tenant mix details should be reviewed.  In doing that you can ascertain just what vacancies are coming up and how they will impact the zone of the property.
  6. Supply and demand for retail space will change in the local area during the year.  The impact of new property developments will also reflect in your market rental.  Keep in contact with the local property development office to understand the new developments that may be coming up.
  7. Car park information will include numbers of car parks and the access methods for customers and tenants.  When it comes to retail property performance, the function of the car park will be important for the future levels of customer interaction and trade.  In many respects, car parking today needs to be accessible, friendly, and secure.  Customers will soon turn away from a property if car parking is too difficult.
  8. Customer demographics and levels of trade will change throughout the year.  Ensure that you understand the typical customer that comes to the property and the reasons why they do so.  Those factors are likely to change throughout the year.
  9. Signage rules and regulations will apply to particular tenancies.  Any new tenant to a property should be suitably briefed on the signage policies that apply to shop presentation.
  10. Landlord works and property improvements will be important issues to the incoming tenant.  Exactly what will be provided to the tenant as part of the new tenancy lease?  Will the lease for the tenant require special modification and allowances for unique tenancy improvements?  What should happen at the end of the lease term with regard to premises make good?
  11. Services and amenities to the property and to the tenancies will be important.  All the expected facilities services and amenities should be well maintained and up to date.  A property that is neglected when it comes to the maintenance of these issues will soon become redundant from the tenancy perspective.
  12. Guarantors and the security deposit requirements will be parts of the negotiation process for the new lease.  Decisions will need to be made regards the types of guarantees required and the amount of security deposit.  These factors may vary depending on the tenant that you secure for the premises.
  13. Fit out design and specifications will be important when a tenant is identified for the premises.  Certain rules and regulations will be required to control the tenant during the fitout construction phase.
  14. Outgoings and occupancy charges will have an impact on the tenant’s ability to trade.  Review competing properties in the surrounding area to understand exactly the types of outgoings that are acceptable in the prevailing market conditions.  Your property should be competitively positioned and not exceeding those charges in other properties.
  15. Standard lease terms and conditions will vary from property to property and landlord to landlord.  Those lease terms and conditions should be set prior to the premises being marketed.  The landlord should consult with their solicitor to ensure that a good standard document is ready and available for use when the tenant is located.  In most cases, the standard lease document will be modified for the existing tenancy and the requirements of occupancy.  If you locate the franchise tenant for the property, it is likely that they will bring their standard lease to the negotiation.  If that is the case, the landlord for the property will require legal assistance to shape the franchise tenant lease into something that works for the landlord and the property investment.
  16. Property as built drawings will be very handy when it comes to tenancy negotiation and tenancy design.  The as built drawings would normally be available through the property management office and or the landlord.  The drawings will be required to help the tenant to understand tenancy design and the availability of mechanical plant and hydraulic services.

So the leasing of a retail property or premises within in a retail shopping centre will be quite a specific task requiring detailed information.  When you prepare for the process of retail property leasing, negotiations can run more effectively and positively.

Leasing Handover of Premises to a New Tenant Today

shops in a shopping mall
Create a system of handover for moving a tenant into a new premises.

When you lease a commercial property as a real estate agent, there is a temptation to pass the transaction over to a solicitor to complete and finalise.  The temptation is more relevant and real when you are very busy as an agent on a number of properties at the same time.  The reality of the situation is that you must stay with the negotiated transaction to the very end after all the monies have been paid and a transaction has been completed.

It is very common for the property transaction to derail for a number of reasons.  When solicitors get involved on the parts of their respective individual customers, the priorities and guidelines of the original deal can become the centre of a debate.  As the real estate agent who did the deal, you need to stay with the transaction to the very end.

Here are some guidelines that can apply to the standard leasing transaction that you could negotiate.  Develop a checklist for the process and modify the checklist for your local area taking into account special property conditions and the prevailing property market.

  1. The lease that is created should be in keeping with the original terms of the negotiation.  It is likely that the lease will be debated between the parties when the document has reached a final form.  Ensure that all the parties sign the document correctly and in the right order.
  2. In some circumstances there can be other documents and disclosures relevant to the original lease.  They may be disclosures, licences, car parking agreements, naming rights, and other documents.  A special note should be made regards retail property; this property type is quite unique and special when it comes to leasing.  A retail property transaction will normally have extra disclosures and statements regards occupancy costs and lease arrangements.  Check out the local legislation relative to property in this regard.  You cannot negotiate something if you do not know how to document the final agreement.
  3. When a lease document is signed, ensure that all the necessary monies are paid in keeping with the transaction.  They will normally be rental in advance, deposit monies, bonds, and bank guarantees.  Those monies should be cleared at bank prior to any occupancy being given and the keys handed over.
  4. If the tenant has any special needs or requirements relative to the new lease fitout design, they will need to enter into some dialogue with the landlord and or building authority regards lodging plans and drawings, together with the approvals for the building or tenancy modification.  The as built drawings within the premises will be of high value to these discussions.  Get copies of the as built drawings from the property landlord.

When a tenant has been given access to the premises, it is quite important to remain in contact with them for a number of weeks in case the occupancy arrangements are a problem.  The property manager or the landlord for the property will also have an involvement with the tenant to minimise difficulty.

So the message here is for the negotiating commercial leasing agent to remain in contact with the tenant and the landlord throughout the lease transaction, and even after its completion.  In this way you will maintain the momentum for the transaction on behalf of your client.  The end result will be a good commission.

Retail and Commercial Property Leasing Agents – Finding Tenants for Your Property Listings

man shopping in a fruit shop in a shopping centre
The right tenants will boost your tenancy mix and lease profile for the property. Choose the right tenants in your business plan for the property.

A commercial real estate agency wants to dominate the market and create a solid market share.  Whilst this is a worthwhile goal, it is also a challenge to achieve.  There are many variables that will have a direct impact on the performance of the agency.

Some of the most frustrating aspects of managing and running a commercial real estate agency today relate to the skills of the salespeople.  Finding salespeople to work within the business is one thing; finding great salespeople is really hard.

Some salespeople will seek to improve their business performance and drive better market share.  Over time their income and listing profile will rise.  Finding the right salespeople with this mindset can always be a challenge; the top agents of the commercial real estate world are diligent and driven.  They know how to drive market share.  They are prepared to call landlords, tenants, property owners, and business proprietors.

Here are some tips to help you build your market share as an agency or as a salesperson.

  1. The traditional signboard placed on property listings for sale or for lease is perhaps one of the most important marketing tools that you can use.  It is cheap and it is a very effective visual marketing tool seen by all of the property owners and business proprietors in the local area.  Invariably, the top agents will have a strong signboard presence in the local area.  As a priority, seek to get signboards on all of your listings as quickly as possible.  When you place a signboard on a property, directly market their property into the local area personally.  That means calling in on property owners and business proprietors to talk about the new listing.  That simple activity will increase your market intelligence significantly.
  2. The best listings to work on are exclusive listings.  So often I hear agents say that they cannot achieve or attract exclusive listings.  Top agents convert exclusive listings more than open listings; they do this because they are good at pitching and presenting their services.  They are also well known through the local area as experts at what they do.  Exclusive listings give you control of your market and the client; in this way you can achieve a better result over time.  If you cannot easily convert exclusive listings, look to improving your knowledge and relevance to the clients that you act for.  Seek to specialise, as this will help you build your exclusive listing profile.  Practice your skills in presentations and pitching.
  3. The Internet is well established as a critical component of commercial and retail property marketing.  Most generic agents simply list a property and place it on the Internet hoping that the Internet profile and exposure will generate enquiry.  There are many more things that you can do with the Internet to improve your listing performance, enquiry rate, and personal profile.  Social media, article marketing, and blogging are very relevant and are highly effective tools when it comes to commercial real estate marketing.
  4. The database that an agent utilizes will be the foundation of future business.  Each agent or salesperson should be working with at least 600 prospects in the local area.  The only way you can manage and work with such a large number of prospects is through an effective and up to date database.  Managing the database should be a personal strategy and process that you undertake at the end of each day.  Don’t to delegate the process to some administrative person in your office; failure to take ownership of your database will destroy your market share.
  5. Cold call prospecting should be first on your agenda each working day.  Contacting at least 20 to 25 new people at the start of every working day will help you improve market share radically and quickly.  The other half of your prospecting process can be with people that you have made contact with previously.  Balance your prospecting equally between new people and established prospects.

The secret to building market share as a good commercial real estate agent is in the systems and the consistency that you establish.  Random actions produce random results.  Develop your system including some of these critical items above.

If you want to get some more tips on how to find tenants to fill your vacancies in your properties, you can get them in our Newsletter.

Tenant Types in a Retail Property

teenager shopping for CD's
Some shopping centre tenants are going out of business. Choose your tenants with a view to the future of retailing.

When it comes to leasing a Retail Property or Shopping Centre, the tenancy mix is critical to the generation of income. When you have multiple tenancies, it is absolutely essential to make sure they all balance with each other.

One important fact of tenancy mix design is that like tenancies can complement each other in the same general location and encourage the spending of the shopper. Further to that, it is quite likely that complementary tenancies selling associated products to the same type of shopper will also work well together.

This means that you can put tenants together that all serve the same type of customer. For example this could be men as it target shopper, and in that case you could put together a series of tenancies within the tenancy mix including:

  • Men’s fashion shirts
  • Men’s shoes
  • Men’s suits
  • Men’s golfing accessories
  • Sportswear
  • Men’s casual wear and jeans

This concept creates a cluster of shopping. Importantly it should also be softened with specific specialty shops of general interest to the broader family and not just men. For example you could place a number of coffee shops or sports drinks amongst the mix.

Tenancy mix is not difficult. It is just a matter of the type of tenancy mix and strategy that will serve the customer that typically visits the shopping centre on a regular basis. When the customer feels that they are well served in visiting the shopping centre, the number of return visits will escalate and the number of dollars spent in shopping will increase.

Tenant Mix Plan and Strategy for a Retail Property

man outside a basket shop
Plan the placement of your tenants in the shopping centre.

When it comes to retail property performance, the tenant mix is a critical part of the leasing strategy. Well placed and selected tenants will help you as the property manager build the customer experience for the property. The end result is a property with:

  • Low vacancy factors
  • Good levels of customer visits
  • Optimised market rental
  • Solid enquiries from the local business community for leasing

All of this means that the landlords property can perform well in the current economic climate.

Property managers and leasing managers should make the tenant mix strategy a key part of the annual business plan for the property. Some good ideas to merge into the plan would include the following:

  • Base rental levels around which new leases can be created
  • Types of rental that allow the landlord to recover a good part of the property outgoings costs
  • Standard lease strategies that set targets on lease terms, options or renewals, makegood clauses, rent review processes, rent review types, etc.
  • Strategies of tenant occupancy that support the anchor tenant in the property
  • Early renewal processes for tenants that are desireable for ongoing occupancy in the property
  • Clustering of like type tenants so you can build off the sales activity of each tenant

Tenant optimisation is a result of a great tenant mix plan and its implementation.

Landlords, tenants, and property managers are all part of the property performance package to underpin a retail property performance.

Lease Proposals in Retail Property Today

fruit and flower stand in a retail shopping centre
Lease proposals and letters of offer to lease, should be unique to the tenant type and the shopping center.

With commercial premises, the leasing process should involve ‘Agreements to Lease’ or ‘Letters of Offer’ between the tenant and the landlord. This enables you to negotiate the final terms and conditions of the lease quite effectively.

When the final ‘Agreement to Lease’ has been achieved between the parties, then that document can be sent to the landlord’s solicitor to prepare the final and original lease documentation. The whole process is clean and straightforward.

It is always desirable to let the landlord solicitor prepare the lease and arrange for the signature of both parties. Invariably solicitors come across smaller matters of dispute which still need to be resolved between the landlord and the tenant. The solicitors are the best ones to do that for the landlord.

Whilst all premises are unique and special, the following is a checklist around which the ‘Agreement to Lease’ could be structured. Simply then add other elements special to the property as appropriate.

  1. The name of the landlord together with contact detail
  2. The name of the tenant together with contact detail
  3. Description of the premises including the reference to any plans or drawings
  4. The area of the premises
  5. The term of lease
  6. The lease commencement date and the end date
  7. Option for a further term if applicable and how that option should be exercised with due regard to timeframes prior to lease expiry
  8. Details of contributions to outgoings expected from the tenant
  9. Details of recoverable outgoings that are normally considered as every day consumables in the premises and how they are to be recovered from the tenant. This would be cleaning, electricity, communications, and energy.
  10. Permitted use of the premises
  11. Details of any incentive to be provided by the landlord
  12. Details of the make good expected from the tenant at the end of the lease term
  13. Car parking detail
  14. Signage detail and approvals
  15. Air-conditioning supply and hours of operation
  16. Access details to the premises including a statement of how the tenant will access the premises at different times
  17. Details of works to be undertaken by the landlord prior to occupancy by the tenant
  18. Details of approval processes that need to be observed by the tenant in any fit-out works
  19. Rent review structure and frequency
  20. Details of the initial starting rental
  21. Details of the guarantees expected to be provided by the tenant as part of the agreement to occupancy
  22. Insurance obligations of the tenant
  23. Confidentiality agreement between the parties
  24. Any other obligations of the tenant to be undertaken during the lease term
  25. Any other obligations of the landlord to be undertaken during the lease term
  26. Special terms and conditions that need to be incorporated into the lease document by the solicitor prior to the signature an agreement of the parties
  27. Obligations of the lease with regard to legislation current in your location or the property type.

This list should not be regarded as finite given that every property is unique and special when it comes to lease negotiations. The list will however give you the main things to look for in the first instance of lease negotiation, and to which you can add the other special terms and conditions of the negotiation in the ‘Agreement to Lease’.

Any lease or tenancy negotiation should include evidence of the condition of the current premises before they are handed to the tenant. At the end of the lease term, you will then know to what condition you expect the premises to be returned to. ‘Agreements to Lease’ are standard procedures used by experienced landlords and real estate brokers.

When you have structured a document that works well for you in your location with your property types, it pays to create a number of templates which simplify the task of leasing and negotiating. Generally speaking, the ‘Agreement to Lease’ is not legally binding but it will facilitate the negotiation and move you towards the creation of a real lease where the solicitor takes over.

Lease Types in Retail Property

blur of people in a shopping mall
Understand the right leases in your tenant mix and shopping centre.

When you list a property to sell or to lease you need to understand the type of lease that you are dealing with. There are definite differences in leases at all levels and hence a lease must be read fully before proceeding.

The better and more fully that you interpret a lease, the more professional you are and you appear to the people that you work with or serve. You can and should add strategic value in the client in every lease that you negotiate. A lease is not just a document to allow a tenant to occupy premises; it is a tactical cash flow that can attract or detract from the property.

The way that leases work will solidly impact on the property and its performance for the duration of the lease. As you deal with tenants or buyers for the property, the type of lease that applies will also impact on the negotiations. Let’s look at the main lease types and expand on the issues for you.

Gross Lease:

Under a gross lease the tenant pays a rent and the building owner will pay all building operating costs (also known as outgoings). This means that the lease itself will have rent review provisions that escalate the gross rent only.

In a lease of this type the landlord needs to know that they can maintain the building outgoings to predictable levels over the lease term. The levels of rent review escalations in the lease must be expected to cover or exceed the escalations in the level of outgoings over future years otherwise the landlord will loose money.

Gross leases are common in retail and office property. Your choice in using this rent and lease type should be balanced against the predicted levels of outgoings costs and future changes for the subject property. Obviously an older building will have steady escalations in outgoings above that of a building that is younger. As a building ages and deteriorates, the gross lease method becomes less attractive and more risky for the landlord.

Semi Gross Lease:

In this type of lease the landlord is setting a gross rent which is paid by the tenant and is reviewed over the term of the lease however the landlord also gets paid some regular money for outgoings under a specific calculation.

The landlord specifically recovers the escalation in outgoings above a nominated base year. This base year is selected at the start of the lease and is usually the last reconciled outgoings year prior to lease commencement, which is usually the previous financial year to the start of the lease (because it is fully reconciled and known as a set value).

As the new semi gross lease proceeds, the tenant has to pay the escalation of the outgoings above the nominated base year. For example, if in a lease the base year for outgoings purposes was set as the financial year 08/09 and the known level of outgoings for that year was $85m2 pa, then in the financial year 09/10 when the outgoings escalate to $97m2, the tenant will have to pay outgoings of $12m2pa. As the lease ages and in the financial year 12/13, the outgoings could be $108m2, and in that case the tenant will need to pay $23m2.

In this type of lease the base year is set and the outgoings ‘gap’ will likely increase significantly as the lease gets older. This type of lease is good for the landlord in that it protects the landlord against the escalation of the outgoings above the base year.

It is common in this type of lease for the base year of outgoings to be updated at the time of any market rent review. Market reviews in this type of lease would be done if the lease was lengthy (say over 3 or 4 years) and the landlord was concerned that they would be out of parity with the rent in the surrounding other properties of similar type. It is not necessary to do a market rent review at any particular time in a lease as the matter is negotiable at lease commencement, however be aware of the fact of re-setting the base for outgoings and the impact it will have on the landlord.

As a further interpretation of this type of lease you should look at the type of outgoings that are recovered in the calculation. It is not unusual for ‘lease savvy tenants’ such as the government to nominate the outgoings to which the base year escalations will apply. Naturally it is better for the landlord to recover the escalation in all outgoings in a building above the base year, however the government tenants are well known for limiting the calculation to rates and taxes escalations.

Clearly a lease is a product of a negotiation, but you need to understand what can be done and then get the best deal possible for your client.

Net leases:

The term net lease is firstly generic; hence you should be aware that there are 3 types of net leases within the category. So let’s look at them.

  • Net lease: In this lease the tenant pays some or all of the rates and taxes for the property or premises.
  • Net-Net lease: In this lease the tenant pays the rates and taxes as nominated in the ‘net lease’ method but they then also pay for insurance premiums for the property and premises.
  • Net-Net-Net lease: In this lease the tenant will pay for the rates and taxes, the insurance of the premises, and they will then also pay for repair and maintenance costs associated with the premises.

So what lease type is the best for the landlord? In most cases the Net-Net-Net Lease is the way to go, however it is a matter of if the tenant will accept and sign that type of lease. As a point of negotiation it would be wise in any Net Lease, or a Net-Net Lease to have a higher start rent for the landlord and better rent review provisions that offset the lesser outgoings recovery for the landlord.

Net-Net-Net leases are common on properties that are fully occupied by one tenant. This is method of lease structure is widespread in industrial property and office property.

 

Percentage lease:

This type of lease is more commonly seen in retail property as the calculation of rent is linked to the trading figures for the tenant. In most leases of this type the tenant firstly pays a fixed base rent that is geared to some rent review method, and then the tenant also pays additional rent that is calculated from their turnover or sales. As the tenant improves its trading, then the rent escalates.

An essential part of this lease structure is to force the tenant to give you accurate and regular audited turnover figures. The lease has to support and enforce the process for the landlord. Monthly turnover figures are the best way to go with the tenant providing the audited figures to the landlord by say the 7th of the next month. The landlord then charges the turnover rent to the tenant based on the audited figures.

This type of lease is also seen in new shopping centres as new tenants stabilize, in supermarkets for the same reasons, and in hotels or pubs. The basic strategy is to give the landlord some cash flow from the base rent from the start of the lease, and then to collect additional rent as the property and the tenancy becomes more successful in generating sales and customers.

Spell it out

In all leases, the recovery of rent and outgoings must be clearly set out to avoid debate and disagreement with the tenant. As you can now see, the selection of the lease type that you are to use on a property will significantly impact on the future for the landlord. It will also impact on any sales situation. It pays to know what is going on in the market regards lease and rent types so that you do lease deals that are similar to or better than the rest of the market. The right lease deals sell properties at better prices.