It depends on the landlord and their objectives. Many landlords manage their own property to save on costs. When a landlord decides to engage a property manager, it is because the benefits outweigh the potential costs (although these costs can sometimes be passed onto the tenant). The services provided by a property manager include tenant management, arranging repairs and maintenance, invoicing, rent collection, rent arrears management, and financial reporting.

Landlords looking to lease a property themselves will have a smaller reach than a larger agency, so potential tenants will be restricted to those within the landlord’s existing network.  The value in engaging a leasing agent is the experience and resources that they can provide, including access to an extensive database of tenants. They will also have the experience to potentially negotiate a better deal than a landlord who leases their own property.

One of the advantages of owning a commercial property is that the tenant is responsible for most of the maintenance, which can include things such as servicing air conditioning units, exhaust systems, roller doors, and grease traps. A landlord is generally responsible for repairs of a structural or capital nature, which can include repairs to a roof, walls, sub-flooring, or any existing installed equipment.

Almost all outgoings are able to be recovered from the tenant under a lease, except where the lease is a retail lease, where the legislation prohibits the recovery of certain outgoings such as land tax or the cost of obtaining mortgagee consent.  Examples of outgoings usually recovered under both commercial and retail leases include council rates and water, insurance, strata levies and electricity.

A gross lease has the outgoings factored into or included in the rent. A net lease has the outgoings recovered or charged separately to the rent.

A gross lease is beneficial if the growth in rent is expected to outpace the increase in the property’s outgoings or expenses. For example, where outgoings are estimated to increase by 2 per cent in the coming years, but rent increases are at 4 per cent. A net lease is beneficial if the reverse is true. That is, where the cost of outgoings outpaces potential rent increases.

Tenants must pass a bank verification process to obtain a guarantee, which provides a further layer of risk reduction for a landlord. A bank guarantee is also a guarantee from a third party to make a payment to the landlord when the landlord calls for it, which means they are not usually recoverable by an administrator or liquidator in the event a tenant goes into administration or liquidation. Cash bonds are simpler and can be provided in a shorter time frame. A cash bond can be held by a landlord or an agent.

Having a diversified tenancy mix reduces exposure to problems affecting any one tenant type or industry. For example, having only hospitality tenants means if there is a lockdown all those tenants may suddenly lose their income. Providing exclusivity benefits the tenant, who can capitalise on reduced competition.

The market rate is determined by comparable properties that have been recently leased in the area. If there is limited supply of an asset, tenants are usually willing to pay more for it, raising the overall rates in the area. The reverse is also true. If there are few tenants looking to lease a particular asset type, rents are generally reduced.

Commercial properties need fewer inspections than residential tenancies. Annual inspections are generally sufficient to check the property for any unreported structural issues and for any non-approved fit-outs or installations.

We recommend reaching out to a tenant six months before their lease is due for renewal or expiry.  This generally aligns with option renewal notice requirements and gives the landlord time to re-let the property if the tenant decides to vacate.

Where the lease is a retail lease with an option to renew, there are legislative provisions requiring the landlord to notify the tenant of the last date to exercise its option. This notice must be given at least two months, but not longer than six months, before the option exercise date. Different provisions apply if there is no option to renew.

Lease renewals and options usually require a market rent determination, as opposed to a fixed or Consumer Price Index (CPI) increase. The market rent determination provides the baseline for negotiating a new agreed rent. If both parties cannot agree on the new rent, a third-party valuer will usually be engaged. If it is a lease renewal without an option and both parties cannot agree on the new rent, then a landlord may terminate the lease and re-let the property.

For commercial leases, the annual rent increases are agreed upon in advance when executing a lease agreement. Rents are usually increased annually by a fixed percentage or relative to changes in the CPI over a relevant 12-month period. It is polite to notify a tenant in advance if they have a rent increase coming to help them to plan for the rise.

There is no standard lease duration for an asset class. Lease lengths vary from property to property. If a property is small and requires no fit-out, tenants may opt for a short lease of between one to three years. If the property is larger or requires an expensive fit-out, tenants generally seek a longer lease period to make the lease worth the initial expense.

If a tenant wishes to terminate their lease early, they must find a suitable replacement tenant approved by the landlord. Tenants can choose to engage a leasing agent to find a replacement tenant and are responsible for all leasing fees and marketing costs. Alternatively, they can choose to find a replacement tenant themselves. The current tenant maintains all existing lease obligations until a new tenant is approved by the landlord and a new lease is signed.

Tenants typically relocate to upsize or downsize to a new property that better suits their size requirements, or because the rent becomes too expensive for them. When market rent increases to more than what a tenant may be able to or is willing to pay, they may relocate to a similar property in a cheaper suburb.