During the negotiation stages before entering a lease, it is highly improbable that you and your prospective tenant will have the same priorities in mind. In reality, it is in the interests of all parties to a lease to have an agreeable relationship during the term of the lease agreement and to be flexible during negotiations. This way, the terms of the lease will be accommodating to both parties and future conflicts can be avoided (or at least minimised).
What are the benefits and drawbacks of short and long-term leases?
It is usually one of the earliest considerations that you and the tenant have to discuss – the length of the lease term.
Longer leases usually run for at least five years. These leases offer both parties a more stable and secure investment. They are much preferred by lessors and investors looking for strong return on investment (ROI), and lessees searching for a stable location to grow their business.
Shorter leases usually run for less than five years. They are generally more favoured by lessors with properties located in popular areas. Shorter leases are lower risk and preferred by tenants who are more flexible.
If you and your lessee cannot agree on the term of the lease, you should consult your leasing lawyer about inserting an option to renew for an additional term as a means of satisfying both parties.
This article will look at the pros and cons of short and long term leases from the landlord’s perspective
Benefits of long-term leases
In a long-term lease:
- there is a more regular and steady income that is guaranteed for a longer period of time;
- there is also more certainty, as you are able to work out what the ROI will be over the term of the lease. Knowing this ROI means that the property may sell for a higher price because of the projected yield and guaranteed annuity stream. This is especially the case if you’re leasing in a place where there is more supply than demand; and
- if there is a chance that the property will not have a tenant during the interim between tenancies, it makes more sense to have a longer lease.
Disadvantages of long-term leases
There are also some obvious disadvantages in having long-term leases. For instance:
- the longer the term of the commercial lease, the more lengthy and complex the negotiations can become. It can take a very long time for the commercial leasing lawyers to establish lease terms that suit both parties.
- it can also be more rigid ending a long-term lease. The lessor might only terminate the commercial lease agreement if certain conditions are met. As a means of avoiding this scenario, try to contemplate the circumstance under which you would want to terminate the agreement and exit the lease during negotiations. An experienced leasing lawyer should carefully draft exit provisions to try and anticipate some of the situations under which you would want to end the lease.
Benefits of short-term leases
There are also a number of notable benefits to short-term leases. For example:
- you can be more flexible with who you choose as a tenant, especially if your property happens to be in a very high demand location;
- if the market shows no signs of slowing, you should enjoy continuously occupied premises; and
- you can increase the rental amount at market rate(and make changes to the terms) of subsequent tenancies.
Disadvantages of short-term leases
There are also some disadvantages when it comes to short-term lease options such as:
- the income of the property is not as secure;
- the risk that the property will not be occupied continuously. This risk means that the property may be worth less because of the weaker ROI; and
- short-term leases do not enjoy the same level of stability as a long-term lease does.
From a landlord’s point of view, there are pros and cons to both short and long-term leases, and the right choice for you will usually depend on the supply and demand of your property in your particular area. For legal advice on drafting or reviewing the terms of your commercial lease, contact LegalVision on 1300 544 755.