Five common mistakes tenants make when deciding to renew or relocate

Do you stay or do you go? The decision to renew a lease or relocate is a decision that many business leaders face as a lease expiry date looms. There are many factors to consider but knowing your future business demands and drivers will ultimately steer you in the right direction.

Financial impact is an obvious first consideration, but other key ingredients are staff retention, productivity, and your corporate image, and you need to ensure that your decision ultimately ticks all these boxes through the term of your next lease.

If you decide to relocate, you will need to adequately factor in the time this will take and the budget required, both for a new fit out and the fulfilment of a make good clause at your current premises, so you need to start planning early enough to ensure a full process can be undertaken.

Getting started early reduces risks associated with making hasty decisions, including being forced to renew at inferior or inflated terms or becoming victim to a range of delays. The current environment with lockdowns is turbulent and has impacted the supply of materials and is pushing decision makers to get on the front foot even earlier. Most of the issues are manageable but having more time creates greater leverage and often results in superior leasing terms being negotiated.

So, what are the most common mistakes people make?

Below are our top five issues to consider in order to save time and money.

1. Make Good – costs for an existing premise are often overlooked when calculating costs for a relocation. Depending on the on the requirements detailed in the make good clause of your lease, these costs can be significant and typically range from $200-$450/sqm for a full make good. It is also worth considering that some items of the fit out can be self-assessed (Division 43 of the Income Tax Assessment Act 1997) and depreciated over the term of the lease i.e., 10 years.

2. Relocating and Undertaking a New Fitout – these costs can vary significantly, with most typically being in the $1,000/sqm - $1,600/sqm range. Our cost saving tip is to find premises with an existing fitout and facilities that suit your company’s requirements. Don’t get caught thinking that an existing space that partially suits your needs is the way to go. It’s often a significant expense to make changes, often exceeding the cost for a brand-new custom interior.

3) Replacing an Aging Existing Fitout – this is an option for companies that don’t want to move but know their existing space no longer meets their needs. Some companies still choose to relocate rather than try to maintain productivity through the disruption of a building site but, there are ways to ensure that refitting is a manageable process with minimal interruption to day-to-day operations. Landlords can allocate what is referred to as churn space, in the same building, often rent free, for staff to work from whilst works are underway. This has the added benefit of refitting the whole tenancy at the same time, reducing construction times and costs.

4) Market Review – just because you have an existing lease deal doesn’t mean you have to exercise it or renew it on the same terms. With time on your side, negotiate a new deal prior to the exercise date. Consider what is going on in the market and use conditions as leverage when negotiating. Doing this early gives everyone notice of what the rent/incentive will be prior to signing and it also provides the opportunity to negotiate on other terms in the lease. Additionally, many market review clauses only allow for a market face rent and do not provide an incentive, so always check this clause before exercising an option.

5) Double Rent and Early Access – you have decided to move and once you have found the perfect new office, it’s time to negotiate the commencing date. Many tenants make the mistake of selecting a date to move in that is the same date that construction commences. This is a costly mistake often resulting in double rent as they are forced to remain in the existing premises waiting for their fitout to be finished. To avoid this, an early access period, again often rent free, can be requested so that construction can start. In some cases, a business will be granted the right to occupy the site on completion of construction if the space is ready prior to the lease commencement date.

I have often heard ‘time’ referred to as a tenant’s best friend. The more time you have, the better the decisions you will make and equally as important is understanding all your options.

With all the facts and our cost-saving tips, you will hopefully choose the right path.