'Sleeping' with the enemy

Posted On Thursday, 23 June 2011 02:00 Published by eProp Commercial Property News
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For those businesses who prefer not to formally engage tenant representative firms because they choose not to sign formal contracts / agreements, answer this:

Michael Schirnig“Do you enjoy sleeping with the enemy?”

That’s right - the landlord's broker with whom you may be working, the one who pitches sites to you, the one to whom you have disclosed important information about your company, the one who says he’ll keep your information confidential, the guy who said he’d get you the best deal…is the "enemy"!   
He (increasingly "she") has a fiduciary obligation to disclose everything about you, your company, and its property needs/strategy to property owners, including your confidential information to the landlord. He is compelled to negotiate against you on behalf of property owners, to get you to pay as high a price as possible, and to get you to agree to terms that are most favorable to the property owners who pay their fee.

Surprised? You shouldn’t be - as the idiom goes "he who pays the piper, calls the tune".

But, deals are done this way all the time….right? That doesn't mean its the right thing to continue doing - in the USA and UK, for instance, most commerical property deals include both a landlord representative and a separate tenant representative, where the tenant representative has been formally engaged by the tenant through a written agreement.
The bottom line? Even if you trust your landlord and are tempted to deal directly with a typical landlord broker, that doesn’t buy you leverage for negotiating. It doesn’t give you important market knowledge, such as available space options, rental rates for comparable space, etc. Without a tenant rep, it could take you countless hours to accumulate this kind of information, and you will still likely wind up losing money.

With a trusted tenant advisor, you will have added leverage. Beyond benefits like peace of mind, enormous monetary risks are involved – over the last 5 years Alchemy has demonstrated that we can deliver savings to our clients up to 15-30 percent in total project costs through better market negotiations and reduced client man-hours.

In the final analysis, tenant advisory firms and traditional firms are not mutually exclusive. In fact, despite differing philosophies, they often complement each other. But before you select a firm, understand the implications of your decision and ask yourself: Whom do you really want in your corner ?
We're renewing our lease at the moment. Should we get the broker that did the original lease back to handle this?
That depends on the outcome you're after.
There are many excellent property brokers in the market, but almost all of them are paid by landlords to secure the best possible terms & conditions for  the owner of the building, not necessarily for you as the occupier.
You have to ask yourself "Would a broker secure you all the economic benefits you're targeting in this once-every-five-years transaction, above the needs of a landlord for whom they do several deals a year?"
If the answer is "No", you need to find an independant 3rd party, who specialises in tenant representation (rather than landlord representation) and who can assist you with researching options and then negotiating with the landlord.

A useful basis for larger corporates understanding how their property occupation costs stack up, is to utilise the IPD Occupiers service which allows clients to obtain independent and unbiased benchmarks on their portfolios, be this owner occupied or leased premises.

CASE STUDY: renewal "options" are potentially worthless
Here's the background: In 2003, Everfresh (a KZN-based operator of 9 fruit & veg-type stores) concluded a written lease with the owner of a shopping centre in Durban North.

A clause in the agreement said the lessee, Everfresh, would have the right to renew the lease for a further period, and that the rentals for the renewal period would be agreed upon by the lessor and the lessee at the time.

In May 2008, Shoprite took ownership of the centre and became the lessor.
It refused to renew the lease with Everfresh, arguing the clause was not a legally binding and enforceable right of renewal. And the Pietermaritzburg high court agreed, ruling  that a clause in the contract giving the lessee an option to renew the lease after agreeing to new rental terms was invalid.

Judge Piet Koen said South African law did not recognise that the obligation to pay a reasonable rental gave rise to sufficient certainty to result in a valid and enforceable agreement of lease.

EverFresh has now gone to the Constitutional Court, arguing that the parties inserted the renewal clause into the agreement of lease with the serious intention of bestowing on themselves and each other enforceable rights and obligations.Watch this space.

Here's the bottom line: Alchemy has always suggested trying to negotiate a specific rental rate for the renewal period during the initial negotiations (your ability to negotiate drops of sharply after signing the initial lease!), or at the very least securing a formula by which the renewal rental would be calculated - "market rental determined by an expert" would be one route.

Otherwise, as EverFresh has found out, one runs the risk of eviction due to a disagreement about what consititutes a "reasonable" renewal rental rate or due to changing priorities on the landlord's side.

Last modified on Wednesday, 21 May 2014 17:05

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