Before You Sign That Lease

5th Avenue
14 Feb 2022

Before You Sign That Lease

One of the most important steps in securing office space is understanding the pertinent clauses, as you will be bound to that document for the number of years you have signed for.

One of the clauses that cause the most financial impact, is the reinstatement clause. The Landlord, at the expiry of your Lease Agreement, will insist or enforce that you return your office space to a white box. That means that the initial tenant installation allowance you were given by the Landlord, and the additional CAPEX you had to outlay, will be demolished, and you will pay for the premises to be repainted white.

What About Rental Deposits?

Another clause to keep in mind would be the deposit amount. Numerous tenants in the current climate, are hesitant to sign personal or company surety and opt for a larger deposit amount. Landlords are conceding to this, but the deposit amount will be linked to y our credit vetting/rating. Should the Landlord then require, for example, a 4-month deposit, they calculate this amount on the last year’s exit gross rental, which is much higher than the commencing gross rental, as you have incurred escalations throughout the Lease Agreement. Escalations are determined by the Landlord on the duration of the Lease Agreement. Should you sign a 5-year lease period, your Broker can negotiate a lower escalation rate for the duration of the Lease.

The Case For Metered Office Spaces

Another clause that has raised concern is metering. This can become a contentious issue, as some tenants operate 24-hours a day and some do not. Take a call centre and a business that operates on a hybrid system since the pandemic, for example. For the latter, this means that staff members work a few days on and a few days off, on a rotational basis.

If the offices are not separately metered, the electricity and water are based on a pro-rata calculation, meaning that you pay a percentage of the building you are leasing in. So regardless of how many staff are operating from the premises, you will pay the same as the call centre, which operates all hours. Which means that you are subsidising the other tenants’ utilities.

Tenant Installation Allowance

Before you sign that Lease, your broker would also need to negotiate the best tenant installation allowance possible, as this is only a contribution from the Landlord, and never covers the full amount for your office fit-out. In the past, Landlords were very specific with what you could use your tenant installation towards. This included partitioning, carpeting, and painting and not data cabling, data points, or purchasing of office furniture for your staff.

With the market being as competitive as it is between the larger Landlords in recent years, there are a multitude of incentives available to prospective tenants. One case in point is Smartmove. A Growthpoint initiative that offers a tenant 125% of the first year’s gross rental, on a 5-year lease period in incentives that can be used for anything, from relocation costs, furniture, data/fibre installation – the list is endless.

Your broker would need to know off the bat which Landlord offers which incentives , and on which buildings, to negotiate the best deal for you, based on the length of lease you are prepared to sign. The longer the leased period, the better the incentives being offered.

Previously, you would negotiate a tenant installation allowance upfront, but the tenant would have to pay the contractors from their pocket for the work done on the premises. Once the work is complete, the Landlord would inspect to make sure that you have used the tenant installation allowance as agreed, and then the Landlord will reimburse your costs on the presentation of invoices for work done.

You can expect to wait up to a month for payment, but the shortest period would be 7 working days. Keep in mind that there are still several Landlords who still operate like this, and your Broker should be aware of the relevant Landlords and their procedures.

Need Help With Securing the Best Deal on Office Space?

5th Avenue Properties specialises in Commercial leases to great client satisfaction. Speak to one of our consultants today to get started!

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