TMX Transform’s Michael Simpson tells MHD about what tenants can do to cope with the challenges posed by tight vacancy rates, skyrocketing rental costs, and complicated landlord dealings.
The industrial real estate market in Australia is experiencing high demand, leaving tenants in complex negotiations with landlords. To succeed in this competitive landscape, tenants must be well-informed, strategic, and aware of their lease obligations.
An occupier’s understanding of their lease obligations is more than just due diligence; it’s their foremost safeguard against unexpected costs.
There are several challenges that can expose tenants to financial and operational disruptions.
- Time Pressures for Completion: Tenants often find themselves under pressure to complete required modifications and improvements to the leased space within a limited timeframe. Meeting these deadlines can be a significant challenge, impacting their ability to commence operations on schedule. Time pressures have especially increased with the labour shortage in Australia, seeing a decline continue into the next financial year to around $210 billion across the construction industry.
- Holdover Risk: Many leases contain holdover clauses that allow landlords to charge additional rent if tenants continue to occupy the premises beyond the agreed-upon lease term. These clauses can lead to unexpected financial burdens for tenants.
- Operational Strain: The demands of negotiating lease terms and fulfilling make good obligations can place significant strain on a tenant’s core business operations, diverting resources and focus away from their primary objectives.
To navigate these challenges successfully, tenants are encouraged to:
- Understand their lease obligations, allowing for realistic timelines, accurate budgeting, and stronger negotiation power.
- Partner with a tenant representative, who can provide market insights, negotiate on their behalf, save time and money, and offer legal guidance and support.
- Consider the landlord’s needs and the value of fit-out. In a market where there is little downtime between leases, tenants could ensure the condition of the premises is in such a state that an early surrender could be negotiated to permit an incoming tenant early access to the premises, incentivising the landlord to release the tenant earlier.
With comprehensive inspections, an understanding of their lease obligations, and knowledge of the value of their fit out, tenants can minimize financial and operational exposure.
References
Labour shortage construction sector’s biggest pressure for 2023 (realcommercial.com.au)
Michael Simpson, Property Portfolio Consultant, TMX Transform
For more information on TMX Transform, click here.