Commercial leases are typically 3 years… that’s the average.
They usually have an option… say: a 3+3+3 lease.
That means that after the first 3 years the tenant has the option of renewing two more times.
It’s not uncommon for tenants to take all 3 options and even renegotiate the lease at the end of that period as well.
If a business is going well it usually makes sense for them to stay put where customers know where to find them.
As much as many tenants stay for years at a time – eventually there will come a time for them to pack up and move on.
So what does that look like and how do you manage it with as little disruption to your income as possible?
Make good clause
When a commercial lease comes to an end you have to get the property back to a rentable condition. That may mean replacing carpets, checking and fixing fire alarms and sprinklers.
These costs will vary based on the kind of property and it’s original condition.
If you own an office for instance you can expect it to cost between $90 and $180 per square meter to return to rentable condition.
An industrial building might be a bit less at $35 to $170 per sqm. If you have to repair concrete floors, remove partitioning, fix up toilets etc these will need to be done before you can get maximum rent again. Industrial buildings often will need a good coat of paint and upgraded signage as these things cop a lot of weather and start to look shabby pretty fast.
Retail is by far the most expensive because retail tenants tend to prefer an empty shell to start with. I’ve seen it cost anywhere from $400 to $600 per sqm to completely remove a tenants fitout and return a retail space to the black canvass they require.
The good news is that most leases require the tenants to cover this cost and do that work. So that’s a big plus.
Trouble is that when a tenant has been there for many years you may not still have the original incoming condition report – so you have to find a way to agree on what condition it was in when it was first leased.
But there is a better way…
Getting paid out
One option I’ve exercised is to agree on a make good cost (by getting quotes) and then asking to get paid out by the tenant. There should be an agreed settlement price in the lease, and of course that amount will have been updated every time the lease was renewed…
If you can negotiate getting a settlement in lieu of them physically “making good” then you may find yourself in a very good position.
With the old fit out in there a new prospective tenant may have a better idea of what their business would look like in your building. They may also want to keep aspects or reuse aspects of the old fitout.
This is good because being able to offer that fitout as part of the value of the lease means you could ask more for your lease.
It effectively means that the previous tenant has made improvements to your investment that you will benefit from.
This is not always worth doing – it’s going to depend on the tenant.
I had an old butchers shop at one point where the tenant made little timber fretworks for federation homes which were all the rage at the time.
To make the property more in keeping with this business he had made lots of these little fittings for the front of the shop which made it look fantastic. So it was worth keeping those as they made it more attractive to the next tenant.
I’ve also have cafes who have left much of the commercial kitchen and the servery behind when they left. This made it very attractive for the next tenant who wanted to open a café…
You’ve got to work these things out on a case by case basis but if it’s going to potentially help you rent it out faster or add value to attract the next tenant it’s well worth considering.