Knowledge is power in lease negotiations.

"Knowledge is power"

- Francis Bacon

My first draft of this opinion piece was titled "Information is power in lease negotiations". Upon reflection, the more fitting expression is "Knowledge is power in lease negotiations".

While information is a pre-requisite and a starting point for effective lease negotiations, knowledge is essential if a commercial tenant is to achieve a tenancy arrangement that supports their enterprise into the future, for it is the knowledge that underpins discernment about what information is important and how the information is to be applied during lease negotiations.

The tenant's knowledge disadvantage

"Differences in power are always manifested in asymmetrical access."

- Marilyn Frye

Regarding lease negotiations, tenants start in the outside lane while landlords have the inside track. The three main reasons for tenant disadvantage are: tenants and landlords have asymmetrical access to leasing information; tenant expertise is directed at their organisation's purpose whilst landlord expertise is focused on optimising the return on investment on their commercial properties; much of the advice to tenants is from conflicted property firms who gain most of their income from landlords.

In combination, these three factors give the landlord a distinct advantage relative to information access, controlling the public domain narrative, and lease negotiation expertise.

Concerning the first factor, studies have found that commercial leasing lacks transparency making it difficult for tenants to access real deals. Certain states in Australia require leases to be registered while others do not. In states that require leases to be registered, access bears a cost and there is no access to the side deeds that record key commercial terms such as the level of incentives. One could say that access to registered lease information is superficial and misleading because the accurate deal information remains confidential and is only known to the landlord and that specific tenant.

In relation to the second factor, return on property investment is a commercial landlord's business focus, and it is in the landlord's best interest to optimise passive and risk-free rental income. To this end, landlords ensure key leasing information is difficult to obtain, while face rentals, which favour the landlord, are more accessible and more widely known.

In relation to the third factor, the commercial property sector is dominated by landlords, leasing agents, capital transaction advisors, and developers who are consolidated, well- organised, and set up to control the narrative in favour of the supply side. Perhaps the most telling evidence is that when we read that the office sector has a positive outlook, this always means positive for the supply side, which implies a negative outlook for tenants.

Overcoming the knowledge disadvantage

"Information is a negotiator's greatest weapon."

- Victor Kiam

It is no easy feat for a tenant to reach an optimal tenancy arrangement that overcomes the tenant's disadvantage and considers the tenant's business requirements and risks into the future. The first step is digging below the surface to get real and relevant information. The second step is judicious use of the information to increase tenant leverage during lease negotiations, that is, applying knowledge to get the desired outcome.

Information gathering is complex and includes gaining a deep understanding of diverse matters that impact a tenancy, including the organisation's business requirements and risks into the future, the real estate market outlook, the real deals being transacted, workplace trends, potential spaces and places, landlord attributes, premises attributes, premises due diligence, and competitor accommodation strategies. Information gaps reduce leverage and increase the risk of agreeing to a sub-optimal tenancy arrangement. The tenant must ensure that potential information gaps are filled to enable knowledge.

Applying knowledge in lease negotiations requires experience, expertise, and the absence of any conflict that would impair one's judgement and disadvantage the tenant. The entire lease negotiation process requires diverse information (see above paragraph) to be gathered, processed, and applied during lease negotiations in a way that optimises tenant leverage throughout the negotiation journey, thereby optimising the lease outcomes for the tenant. As much of this information is not readily accessible, and as the related tenant-side expertise is hard to come by, it is prudent for a tenant to look to an attested and conflict- free tenant advocate to act for them.

Concluding comments

Organisations are having to adapt quicker to external change, resulting in the need for more flexible accommodation arrangements with more risk borne by the landlord. The correct information and the proper knowledge are essential if a tenant is to achieve accommodation arrangements that mitigate risk and help to future-proof the organisation.

John Reed - Director LPC