Landlords Lease Strategy

Leases are the cornerstone of the cash flow to the investment property. For that reason lease strength, structure, and integrity is quite important to the future of the property.When real estate operatives are working with an Investor in setting up or exploring a new property appointment, it is important that they ask the right questions regards the tenancies and leases. In only this way can you get to the lease plans and strategies that are needed to match the property to the landlord.In this article we provide a number of key lease concepts which can be discussed with the owner in the early interview process on the investment property.Each item below can be expanded subject to the nature of the property. You may then formulate your own fuller questionnaire which supports the process.Key Lease IssuesRental income – seek to understand the levels of rental paid by rental category and by each tenant. Understand that some tenants can pay more than one type of rental such as storage rental, and car park rental. You need to explore all the types of rentals which are paid on the property. You then need to compare those rentals to the surrounding market.

Percentage rental and base rental – these types of rentals are common in retail property and usually reflect an extra rental payment or an escalating rental payment under certain circumstances relative to the tenant’s trade levels.

Licenses — the use of licenses is quite common in all investment property and is normally the way of documenting other types of proper usage and occupation beyond the normal tenancy scenario in a lease. In particular licences can be used for signage rights, signage, storage rental, and car park occupation. The licences are normally renewed each period of 12 months and feature terms and conditions relative to the item or location that they are the subject of.

Electricity charges – electricity is always active within tenancy occupation. It is necessary for you to understand how the electricity is supplied to the tenants and paid. In some properties it is common for the tenant to arrange their own supply from the local energy supplier. In those circumstances they would pay for their power usage direct to the supplier based on the consumption of the tenant’s premises. In other buildings of multiple tenant occupancy, it is common for the landlord to buy the energy and power into the building in a bulk supply from the energy supplier. This means that the landlord pays for the energy themselves and then charges the tenant for their own consumption usually on a per calendar month basis. In such case each tenancy has their individual sub meter which monitors the energy consumption relative to the tenancy. Please note that there are various consumption levels and rules in this process. You must check with your energy supplier and identify rules relative to your location.

Cleaning charges – the cleaning of a commercial property is obviously important and needs to be controlled. Under the terms of the lease, obligations of cleaning the premises are imposed on the tenant and or the landlord to ensure that clean conditions are maintained on the property. In some circumstances the entire cleaning discipline is delegated to the tenant who must ensure that certain cleaning duties and levels of presentation are maintained throughout the year. In that circumstance the tenant pays for those charges as they arise. In other buildings it is common for the landlord to arrange for the total cleaning of the building and also the tenancy areas. In those circumstances the landlord would charge back to the tenancy their proportion of cleaning charge based on the net lettable area to which they occupy. Understand that beyond these issues there are other cleaning charges which apply to the common area in the building and they are toilets, window cleaning, foyer cleaning, and other sundry cleaning issues. Common area cleaning is normally processed through the building outgoings and subject to the terms of the lease can be charged back to the tenant at the end of each financial year. Please read your lease accordingly.

Signage rental – some tenants will, through special arrangements with the landlord, gain approval for signage to display their business name. That signage is simply installed outside the tenancy or at a particular point on the property. In other circumstances and particularly in city areas, you will see some major tenants purchase the entire signage rights of the building and thereby install large signage on the building and brand the building as their own as far as ‘identity’ is concerned. All matters of signage should be documented so that any rentals which are agreed for the signage rights are paid under the terms of the lease. In many circumstances the existence of signage on the outside of the property will firstly require the approval of the local planning authority or council; this must be checked and all normal approvals from the authority gained before you proceed further.

Miscellaneous rentals – there can be many other types of rental applying to tenant occupancy. Such items may be rental for air conditioning use after hours, rental for the installation of communications antennas and systems in the building, rental for the use of storage areas elsewhere in the building. Explore these different types of rental so that a complete picture at income is fully available in your analysis of the building. If a tenant asks you to do something special regards occupancy, it is likely that the matter could attract a rental. Any income is good for the landlord and you should be vigilant in opportunities for income generation.

Outgoings – outgoings are charges which relate to the running costs of the building. In particular these running costs involve many different categories of building activity and under certain types of leases may be charged back to the tenant each financial year or each calendar month. The leases which feature outgoings recovery are commonly called net leases. If outgoings are recovered from the tenant as part of their occupancy, you need to understand what the tenant does pay for and how often that amount of money is paid. Usually, if there are tenant outgoings to be paid, there is a reconciliation process which applies at the end of the financial year to adjust for any over or underpayment relative to that tenancy area. The history of these outgoings payments is of interest to a property buyer as they consider the price that they should pay for the property.

Outgoings and the base years – in some buildings there are leases known as gross leases. As the name suggests and indicates, the tenant has received an occupancy which includes some of the outgoings charges if not all the outgoings charges applying to the tenancy area. This means that they pay one rental per calendar month and no other charges. In some circumstances however these gross leases also feature and include a base year for outgoings purposes. This base year reflects the value of the outgoings in the first year of the tenant’s occupancy only. Should the outgoings for the building escalate above the base year component in subsequent financial years whilst the tenant is in occupancy, then the tenants can be charged for the escalation based on their occupy area. This component is called the base year component for outgoings purposes and calculates and reflects the increase of outgoings above the base year. A lease of this type is sometimes called a ‘semi-gross’ lease. This suggests that the rent does not include all of the outgoings, and that other outgoings are to be paid.

All outgoings categories recovered – when exploring new properties for lease or property management, seek to understand all the types of outgoings which apply to the property and are paid by the landlords tenants. A comprehensive list of outgoings recoveries is important to the final net income for the property and will impact the price that the property will gain at sale. Seeking historic detail regards these outgoings is also very useful and important particularly when it comes to budgeting processes each financial year in preparation for the new financial year.So these are some of the main lease issues to look for. In all cases of property review you should read the lease in complete detail before commenting on market matters such as buyer or tenant interest in the property. One lease and the terms contained therein can change the market interest in a property substantially.