The commercial property market has seen dramatic changes in recent years and these changes are no more evident than in the commercial lease terms that landlords are agreeing with prospective tenants. In addition to shorter lease terms, lower rents and greater rent concessions, the dramatic reversal of the negotiating position of commercial tenants is evidenced in the lease negotiations, with tenants requiring greater flexibility and 'tenant-friendly' lease covenants.
Commercial tenants are insisting upon far less onerous repair and yield-up obligations to ensure that they do not risk the imposition of significant exit costs at the end of the lease. The traditional 'full repair' obligations are being diluted by reference to detailed schedules of condition, the incorporation of 'fair wear and tear' exclusions, with the removal of the tenant's fit-out being at the discretion of the tenant, not the landlord.
In a typical lease term of ten years, tenants will most likely enjoy a break option during the term (e.g. at the expiry of the fifth year) and tenants are highly sensitive to dilapidation costs that would arise on foot of their repair obligations. In addition to the dilution of the core tenant repair/yield up covenants, tenants of multi-unit buildings are seeking to exclude any contribution towards capital expenditure incurred by the landlord, that heretofore would have been recovered by the landlord via the service charge. Tenants view such capital expenditure as being a cost to the landlord of maintaining the investment value of the building and should not be recoverable from the occupational tenants that are in occupation for periods of ten years or less.
Tenants are very sensitive to the additional costs associated with their demise, especially commercial rates and service charge. While commercial rates are somewhat outside the control of the landlord, tenants require clear visibility on the cost of the services provided and will insist upon a detailed service charge budget, if not audited accounts of the management company. In certain circumstances, tenants are insisting that landlords renegotiate with their managing agents and third-party contractors to ensure that the services to the premises are being provided at the most competitive rates in the market. In addition to applying pressure on the landlord to renegotiate the services, tenants are inserting express exclusions in the service charge...