Where do I Start to Negotiate a Market Rent with the Landlord?

BY KELLY CUNNINGHAM, YOUR LEASING CO.

Rent is one of the most important things to negotiate in any commercial Lease and so it is important that you understand all of the elements and considerations that make up a fair rent negotiation, to ensure you are doing the best by your business and maximising your profit.

What is market rent?

A market rent is defined by what the tenancy would be worth if it was vacant. If your tenancy was unimproved and available to the market, what would the Landlord be seeking in rent from a new Tenant? Once you know this, you know the market rent.

Next question then is … how do I find out what that is?

There are a number of ways to establish this, but the best way is to compare your premises to others that are available on the market today and see what they are renting for or find out about recent deals done in your area. We can help with this!

Once I know this, does my Landlord, then have to agree to this?

No, the Landlord is allowed to make their own determinations when it comes to the rent for their property, but it is certainly helpful in your negotiations to be able to provide some comparables to the Landlord to show why you think your rent should be at a certain level.

Remember, the market rent is what your tenancy would be worth, if it was unimproved and available to the market. Your existing tenancy is neither of those things exactly, as it is fitted out (so not “unimproved”) and is occupied by you, an existing business (not “available to the market”), so the market rent is really just an indicator to get you started.

You will then need to work out what kind of premium on top of the market rent, is fair, to compensate for the fitted-out premises and existing business elements.

Wont the Landlord propose the market rent?

The Landlord will propose a rent which will generally be an increase on your existing rent. This may or may not have a relationship to the market rent indicators. Landlords are always looking for growth on their assets, so their ideal position is nearly always an increase.

Remember, the rent you are paying now is only the rent, because you agreed to an amount 5 years ago, when you entered the Lease and that amount has increased annually by 3,4 or 5% or CPI, to bring the rent to what it is today. The rent today is based on a calculation determined 5 years ago, not what is going on in the market today.

Often, these two numbers are very different.

KEY TIP: USE THE MARKET RENT AS YOUR STARTING POINT FOR A NEGOTIATION, NOT THE LANDLORDS ASKING RENT.

Tenants often make the mistake of negotiating their position from the Landlords asking rent, rather than the market rent indicators, meaning that if they save $10,000 on the Landlords asking rent, they feel really pleased with the outcome, but what if the market rent is $30,000 less?

What is percentage rent or turnover rent?

Percentage Rent or Turnover Rent is most often seen in shopping centre leases. This is where the Landlord gains access to your sales figures and then at the end of the year, calculates whether you should pay them more rent based on your sales.

If you are paying a fair market rental, then have a percentage rent provision in your Lease as well, this may mean that if you perform well, you are penalised by the Landlord and will end up paying more than what is fair for the actual real estate.

Percentage rent is a great tool, however, if you are unsure of how the business will perform. It means that the amount of rent you pay is tied directly to the business performance. If sales are low, then so is the rent, however, if sales are high, then the rent can be too. It is important to just work out a percentage that you think is fair.

KEY TIP: KEEP THE PERCENTAGE LOW, SO THAT THE THRESHOLD FOR PAYING “PERCENTAGE RENT” KICKING IN, IS HIGHER THAN THE MAXIMUM SALES, YOU THINK YOU COULD ACHIEVE IN ANY ONE YEAR.

What is gross rent?

Gross rent is when the rental payments you make to the Landlord include the common outgoings for the property. Most leases include an element of net rent (profit centre for the Landlord) and then a contribution to the common property outgoings, for things like common cleaning, security, council rates, insurance etc (a direct recovery of actual costs).

These operating costs can go up and down quite dramatically and if your Lease is a NET Lease, with rent and outgoings calculated separately, rather than a GROSS Lease, then you will pay your outgoings contribution to the Landlord annually and this will move up and down, as expenses move up and down.

If you have a GROSS Lease with gross rent payable, then you will pay a fixed amount per month and this will just increase annually by an agreed rent review amount, often 3,4 or 5% and this will happen, irrespective of the changes to the costs involved in operating the property.

KEY TIP: OPT FOR A GROSS LEASE WHERE POSSIBLE

If you have any questions about negotiating the best outcome for your next Lease, please call Your Leasing Co for a free, no-obligation conversation on 1300 356 702.

@yourleasingco