The global response to the pandemic has impacted the leasing market with changes being felt across all sectors. Vacancy rates are rising and subleasing of office space is reported at record highs in Australia’s eastern state capitals.
Organisations that were reluctant to ‘trust’ their employees to work from home over productivity issues and employee reluctance to give up fixed and agile workspaces, are now embracing working from home. While the pandemic has impacted everyone, many CFO’s are rubbing their hands together, working on strategies to optimise and rationalise their organisational workspace requirements to help their bottom line.
As recently reported in the Financial Review on 19 Oct , AECOM broke their lease with Investa two years early reducing their Sydney footprint from seven floors to five at 420 George Street Sydney and reportedly reducing one floor in 540 Wickham Street, Brisbane. Charter Hall also experienced a significant impact to their occupancy at Bowen Hills, Brisbane with Virgin Australia vacating their headquarters six years early due to the company entering into voluntary administration. With this trend likely to continue it is a timely reminder to review your Leases.
Understand your Lease
It is typical for a tenant, once their lease is executed and internal occupancy planning is complete, to hand over its administration to their operations personnel. This however is the danger period for tenants when control starts to slip and we see it far too often. After five or more years different personnel within the lessor and lessee entities will then struggle to unravel the original intention of the lease and resolve such issues as:
- Who owns what?
- Who is responsible for what?
- What changes have occurred in the intervening period?
- Have changes/additions/alterations been approved? When? and who owns them?
- What is the impact on Make Good?
- What condition is ‘reasonable’ and what is reasonable wear and tear?
These issues can be vexing and sometimes unnecessarily costly for both the tenant and the landlord. A potential solution lies in the form a Schedule of Condition at lease inception in addition to a Notice to Alter.
A Schedule of Condition is a survey conducted at lease inception by an independent consultant that sets out a benchmark condition. This is sometimes referenced in and appended to the lease. An accurate schedule will assist both parties and mitigates the risk of future deputes by providing a factual description of the condition of the space, with photographs (video footage), plans, and a distinction on ownership (supplementary air conditioning, back-up generators etc) removing emotive discourse and maintaining relationships.
Good practice will see an update of the schedule during the lease term with a Notice to Alter. This report is an addition to the original schedule and states a ‘new’ benchmark. It is beneficial to undertake this report to capture any changes during the lease period and prior to renegotiations to extend or execute lease options. At lease expiry or termination, ambiguity in negotiations is removed. Also, during the life of the lease these reports can assist with resolving any breaches or failures by either party to maintain and repair.
At lease termination whether early or scheduled and on yielding up, the lease should be reviewed and the Make Good assessed. It is at this stage, if good practice is followed, it becomes a relatively easy exercise to establish and prepare for any breaches. Make Good liability assessment based on clear reporting can preventative to further disputes. Typically, an independent assessment is undertaken utilising the previous reports with a Scott Schedule of costs and relevant clauses. However, if no previous reports have been undertaken it is best to engage an independent Consultant to undertake a full assessment tied back to the lease and any supporting information. The Final Schedule of Condition (Make Good Report) is then used in final termination negotiation or exit negotiations. The Consultant may, if required, be party to the negotiations and provide substantiation to the Scott Schedule.
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