Hidden Dangers of Leasing Office Space

By September 11, 2017 news No Comments
Hidden dangers

Acting for commercial office tenants in an advisory capacity is never dull with many a twist and turn. Whilst most transactions are straightforward there is always some unforeseen situation that will jump out of the closet and as such will either need to be nipped in the bud early on, circumnavigated or just kicked into touch. Clearly the principal terms of any deal such as rent and incentive will always require close scrutiny but it is often the seemingly innocuous conditions or those not spelt out that can see the wheels fall off the transaction. Set out below are some of the more unusual situations encountered by Goodwin Property Advisory over the years of providing independent advice to commercial and not for profit organisations:-

1. Planning

With increased land values many properties particularly in the inner suburbs are being converted to higher valued uses. Many warehouses have been converted to “chic” office space and the broadening of uses within industrial zones allows for a greater percentage of the building to be used for office. Despite what may be offered as an office some of these building will have planning restrictions regulating the percentage amount of space that can be utilised purely for office the remainder having to be used for industrial or warehouse use. It is therefore important when leasing such premises to check the planning scheme to ensure the proposed use of any premises is permitted prior to executing lease documentation.

2. NABERS Ratings

Building owners when advertising office space for lease or sale of 1000 sqm and more are under a statutory obligation to advertise the NABER’s rating for their premises and there are large fines for those who do not comply. Furthermore landlords will include clauses within their leases to ensure the tenant does not do anything to affect the energy rating of the building. Organisations with higher than normal energy consumption such as data and call centres may therefore fall foul of such clauses and restricted as to how they may use the space.

The Commercial Building Disclosure (CBD) Program is a national program to improve the energy efficiency of Australia’s largest office buildings. The Building Energy Efficiency Disclosure Act 2010 (BEED Act), implemented through the CBD Program, imposes mandatory energy efficiency disclosure obligations on many commercial buildings. Under the BEED Act, most sellers or lessors of office space of 1000 square metres or more are required to:

  • obtain and disclose an up -to-date Building Energy Efficiency Certificate(BEEC), which includes a National Australian Built Environment Rating System (NABERS) Energy for offices rating and CBD Tenancy Lighting Assessment (TLA)
  • include the NABERS Energy rating in any advertising. What does this mean?

Each BEEC includes a National Australian Built Environment Rating System (NABERS) Energy for offices rating for the disclosure affected building. This is a way of rating the energy efficiency of commercial buildings by comparing them against benchmarks developed using actual building performance data. The NABERS Energy rating on a BEEC includes a star rating and annual building energy consumption and greenhouse The NABERS Energy for offices rating is a national rating system that measures building performance on a scale of zero to six stars. A zero-star rating means the building is performing well below average and has lots of scope for improvement. A six-star rating indicates a market leading performance, with half the greenhouse gas emissions or water use of a five-star building.

3. Redevelopment/Relocation Clauses

Most agents will tell you on your first inspection if there is to be a redevelopment or relocation clause in the lease. Unfortunately this does not always occur and sometimes the information is not conveyed in the initial heads of agreement or discovered slipped into the end of the lease. Sometimes these clauses can go unnoticed to dramatic effect. Such clauses are usually rolled out for leases of older building where the landlord proposes to redevelop or undertake a substantial upgrade to the building. The upshot being the building owner can provide 6 months notice to the tenant to vacate or relocate. The consequence of receiving such notice can be extremely disruptive and financially penal.

4. Building Approvals

The majority of tenants moving to new premises will require to carry out building work in the form a new fit out or alterations to existing tenancy fit out. Furthermore the use of the premises may create a requirement for the landlord to upgrade the common area facilities. However, the building process has some pitfalls for those who are uninformed. Before making any legal commitment it is imperative that the requisite permits are obtained. Specific uses such as call centres, educational and training uses in particular may require upgrades of toilet facilities, air-conditioning and disability provisions in order to comply with building code provisions.

There are many things to consider before starting your building, such as whether your job requires a building permit or a planning permit (or both). The Building Act 1993 (the Act) and Building Regulations 2006 (the Regulations) legislate that all building work is subject to the issuing of a building permit, unless an exemption exists for the proposed work under the Regulations. This includes some minor alterations, demolitions and repair or maintenance work. A building permit will specify that either an occupancy permit is required or  a certificate of final inspection is required on completion of the building work.

5. Fitted out space

Landlords do not usually provide fitted out space. It is the tenant who will normally construct their own within the premises leased. Whether taking a lease of existing fitted out space or installing a new fit out landlords in most cases will insist on the fit out being removed at the expiration of the lease term and the premises being redecorated and sometimes re-carpeted. This is a cost that needs to be accounted for when reviewing alternative premises options as it can add anything from $100-$300 per sqm to the lifecycle cost of the tenancy. In the event of leasing existing fitted out space the tenant should always endeavour to ensure they do not have a requirement to re-instate the premises at the expiry of the lease and also seek to agree a schedule of condition at the lease commencement evidencing the condition of the premises to ensure no future disputes arise as to the initial condition.

6. Use of premises

To save a lot of time and expense it is always a good idea to let the building owner know what the intended use of the premises is to be and nature of the business. Most office uses are quite straightforward though many will ring alarm bells. Schools, colleges, call centres, social services groups, embassies are not always good bedfellows with commercial businesses and many landlords may not wish to have these users in their buildings. Furthermore whilst there are anti discrimination laws there are instances where an organisation use may be knocked back on ethical social or religious grounds as has been the case with some gambling and alcohol groups.

There are many other factors that could be listed here that can ultimately frustrate the leasing process such as financial guarantees, rent review provisions etc. The point to be emphasised here is that whilst on the whole leasing should be straightforward occasionally issues arise that are unexpected or unconsidered and therefore it is important that when committing to new premises a proper evaluation process is initiated to forestall future aggravation or unbudgeted expense.

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