Top five mistakes of commercial tenants

5:26 PM Tuesday November 21, 2017 True Commercial

Landlords says tenants often don’t understand how much space they need. Photo / Supplied

As part of a new publication for Auckland called Office Options, Barfoot & Thompson Commercial held an impromptu survey of landlords about the five most common mistakes made by tenants of commercial buildings.

Office Options showcases 32 office properties from Manukau to Albany and the agency asked the landlords to outline the five main things they feel tenants get wrong when leasing office space. The following five errors accounting for 92 per cent of the overall responses.

Approvals

Barfoot & Thompson Commercial’s office leasing specialist, Lorne Somerville, says it’s vital tenants understand internal approval processes and engage key decision makers early.

“Landlords feel tenants often look for space without a clear understanding of their needs, entering into negotiations only to engage key stakeholders for approvals at the 11th hour.” Somerville quote one landlord saying: “This wastes time and money while frustrating agents and landlords.”

“There is nothing worse than landlords, tenants, lawyers, fit-out contractors and agents putting in considerable work to agree commercial terms — only to have an approval process take much longer than anticipated or for approval to never be obtained.”

Timing

Landlords feel tenants do not understand the timeframes required for the design, consent and construction process in the current market.

Somerville says that, depending on the size of the tenancy and the condition of the premises, the process of designing a fit-out, obtaining building consent, finding a contractor to complete the works and build the fit-out can easily take three months and up to six months.

“Often tenants have spent considerable time reviewing options in the market to identify the right space. Typically, if you have over 50 staff, you need at least 12 months to complete all the required steps. The trick is to not run out of time,” he says.

Fit-out

Tenants often don’t understand how much space they need, say landlords. They frequently lease space that is right for today but fail to allow for enough expansion or contraction as their needs change, over the term of lease.

In today’s rapidly changing business environment it is difficult to determine head count over 2-3 years, let alone six or even 12 years – the typical length of a longer term lease.

“Tenants need to spend time up front to determine what they need now and in the future,” says Somerville.

Legals

Landlords believe tenants often don’t understand the terms and conditions they have agreed to in the Deed of Lease. One landlord said: “Tenants are effectively putting the lease in the bottom drawer and forgetting about their lease terms.”

Somerville says there is a consistent theme with rent reviews, lease renewals and reinstatement obligations. Many tenants are highly focused on incentives and new fit-out at the expense of review mechanisms and costs to ‘de-fit’ to open plan layouts at the lease expiry. Often the key decision makers will not even work for the company at the lease expiry.

Tenants need a system to ensure they are on top of rent review dates, and when they need to give notice to renew a lease. The system needs to work irrespective of the people involved and allow for the key decision makers to change over the term of the lease.

“When it comes to reinstatement, the time and cost spent on obtaining a premises condition report at the lease commencement will pay significant dividends at the lease expiry,” says Somerville. “This is common sense but so many tenants have a ‘she’ll be right’ attitude and then realise they have a substantial cost and legal obligation at the lease expiry when they want to move.

Money

Accounting for 30 per cent of the landlord responses was “financials”. One landlord put it simply: “Tenants need to pay more rent to achieve their dreams.”

Somerville says most tenants desire a nice office space to help attract and retain staff but there can be significant costs in moving to new office premises.

Landlords surveyed stated tenants often focus too much on reducing costs. That can mean using the cheapest fit-out contractor, re-using old furniture or the relentless pursuit of increased density so they are leasing less space.

“Often this results in a compromise where the cost savings never materialise,” says Somerville. A number of landlords felt that tenants use the cheapest fit-out contractor. “But it ends up costing them the same and they have a whole lot of dramas on the way through. The old adage holds true – you get what you pay for.”

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Lorne Somerville, Barfoot & Thompson City Commercial.