20 MARCH 2013
Controlling costs associated with commercial leases is ideal for any tenant. However, to achieve this it is important that you turn your mind to appropriate cost saving strategies at the start of lease negotiations, to avoid being cornered into accepting a lease which exposes you to uncertainty about your costs over the life of the lease.
Some useful cost control tips for commercial tenants include those in the following areas:
- Outgoings – we recommend obtaining outgoings estimates from landlords early in negotiations to see the amount as well as the specific types of outgoings that the landlord intends to pass on to you. It is also advantageous to limit the types of outgoings the landlord may charge, rather than accepting broad outgoings clauses which give you no control or certainty over costs which the landlord may try to pass on to you later.
- Make Good – the actual cost of complying with make good obligations at the end of a lease can sometimes be overlooked by tenants, particularly since it is often not clear on the face of the lease what those costs will involve. Tenants should be proactive in trying to limit their make good obligations as far as possible. For example, you should seek to avoid the obligation to return the premises to base building configuration. Your prospects of having this agreed may increase where you agree to undertake a standard fitout which is likely to be suitable for a future tenant. Redecoration clauses should also be negotiated out where possible, particularly for short term leases where they appear excessive.
- Landlord’s Legal Fees – in recent years, landlords have been taking the position that the tenant should pay the landlord’s legal costs of preparing and negotiating the lease. We suggest strongly taking the position that each party bear their own legal costs given each party benefits from the lease. If this cannot be negotiated in, then a nominal contribution to or appropriate cap on these costs should, at a minimum, be required because failure to do so in effect means you will be funding negotiations against yourself which can be used by cunning landlords as leverage to force you to accept their position under threat of further legal costs.
- Capital Costs – any obligations on you to carry out works at the premises (for example, installation and maintenance of fire safety and air conditioning equipment etc) should exclude responsibility for costs of a capital nature e.g. replacement costs where equipment becomes unserviceable. This is because these costs prolong the life of the equipment which is often a benefit to the landlord, particularly in short term leases.
Usually your ability to obtain favourable outcomes on the cost areas outlined above comes down to your bargaining power in negotiations. This is why it is important to give yourself plenty of time and alternatives (i.e. alternative premises) to avoid being pressured into accepting a bad deal, including a deal which involves limited cost controls.
You are a valued Kinneally Miley contact, for more information related to this Legal Update please contact us.
[contactsbox] [leftcolumn]Contact Partner: Michael Coe
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