Not all landlords are created equal.
Bitter experience has shown that tenants can benefit by having a better understanding of landlord personality types – preferably before the lease is signed. As with all other commercial and social engagements, values, attitudes and service delivery approaches of owner investors in commercial property can vary significantly.
These variations change the dynamics in the ongoing responses and commercial dealings that tenants have with their landlords and managing agents, in both existing and new leasing arrangements.
Here is a brief overview of five landlord personalities that are frequently encountered in the commercial property market. But tenants need to be also aware that some landlords may have symptoms of dissociative identity disorder, displaying traits across a number of personality types. Other fringe landlord personality types may also prevail.
These landlords have a huge sense of self-entitlement. They believe because they own commercial property, the tenancy fraternity owes them a living. During initial negotiations, platitudes will be made to prospective tenants promising much, but once the deal has been consummated, they consistently fail to deliver. All the unwritten promises will evaporate and tenancy rights will be severely curtailed by the fine print of very one-sided lease agreements.
And tenants should never be so bold as to vaguely criticise the quality of a building and services that continually fail – this will be taken as a personal insult. These landlords believe their buildings to be the best – other accommodation options or deals will not come anywhere near.
The best advice is to stay clear of these landlords, provided you can identify them early in your search for premises. Managing agents are usually their protective foil, seldom providing objective answers. Remember, he who pays the piper calls the tune. Also there is little point in being accommodating and collaborative – this will be seen as a weakness to be exploited. Be ready to brief your solicitors early in the lease term – this is likely to be a long, expensive and acrimonious relationship.
Naive ‘Mums and Dads’
More manageable are the ‘mums and dads’ landlords. They will have invested in commercial property as part of their retirement plan. The biggest issue here tends to be a lack of understanding of the market and an inability to meet their base building and structural repairs obligations. These landlords tend to be emotionally attached to their properties – so resist making any negative comments.
These landlords will have relied on the representations of the selling agent regarding the property condition and terms of the lease agreement – not fully understanding the landlord obligations and life cycle capital funding needs. Once they understand the issues, these landlords will genuinely want to rectify the defects, but access to capital funding will likely be signifi cantly limited, with the property leveraged to the limit and a bank unwilling to make further advances.
But it is worthwhile to be collaborative with these landlords. Tenant loyalty during the tough times will be appreciated and then rewarded during renegotiations. Early negotiations to extend a lease can deliver significant rental reductions, particularly for single tenants in non-prime properties. However, rent-free periods may be problematic, with monthly rental needed to make bank repayments.
However, be wary of verbal promises and over-friendly relationships with these landlords. Although the intent may be genuine and sincere, the sudden demise of the landlord can yield unexpected consequences. A transfer to heirs or sale from the estate can mean a new aggressive owner will be unlikely to honour any prior undertakings not properly documented.
Absentee landlords, residing overseas, can be a tenant’s worst nightmare. Property ownership cultures, understanding of landlord obligations and approaches to asset life cycle maintenance are different. In some cultures, properties once purchased, are not maintained to the standards that Australians expect.
Local managing agents, once again the protective foil, are powerless in convincing these landlords to undertake repairs and maintenance. These agents are often as exasperated as the frustrated tenants, unable to committed to the landlord getting anything done. But the agents will at least be receiving a management fee – subtracted from the rent you pay – for their futile efforts, so be persistent in registering your complaints.
As before, it’s best to stay clear of these landlords, if you can. And it pays to brief your solicitor early at the first signs of landlord obligations not being met. However, even this approach may not bring the desired actions, but don’t take matters into your own hands. For example, if rental payments are withheld, the absentee landlords will be quick to use the Australian legal system to their advantage.
The investment banking, syndicators and opportunity fund fraternity seek out any types of assets that have revenue streams (and potential turnaround opportunities) to manufacture aggressive investment returns for their investors.
With access to large pools of funds, these opportunistic landlords may control many large commercial buildings as they accumulate their investment turnaround portfolios. The objective will be to list on the stock market or do a trade sale, once the critical mass is achieved and the market conditions are right.
Usually there is ‘short-termism’ that pervades the asset management philosophy of these transient landlords. Decision-making will be focused on maximising short-term net income, often to the detriment of the longer-term performance of the property and the ‘quiet enjoyment’ of premises by the tenant.
The landlord’s obligations, in maintaining the base building performance, will be determining the least amount of expenditure to keep the building functioning without the lack of maintenance becoming too evident.
But this short-term net income focus can provide an advantage to an astute tenant who is aware of the landlord’s agenda and potential timing of the planned exit strategy. Tenant negotiations can trade off relatively small short-term fi nancial pain, against signifi cantly greater longer-term gains. In addition, these landlords are keen to undertake early lease renegotiations to extend the weighted average lease expiry (WALE) profiles, to drive down required investment yields and drive up realisable portfolio values. Therefore, large incentive payments may be offered to extend lease terms.
A very large component of the commercial property stock in Australia is owned by institutional landlords, representing superannuation funds, listed real estate investment trusts (REITs) and wholesale (or unlisted) trusts. Over the last few decades these landlords have matured in their sophistication as landlords, attracting large pools of commercial property talent into their teams. In addition, there has recently been a discernable refocusing to treat occupiers in their portfolio as customers and not merely tenants who have signed up to lease agreements.
The overall focus tends to be longer-term, with a detailed understanding of asset life cycle management and what may be needed to ensure their buildings retain their competitive market positioning. Tenants in these buildings will likely have requests and complaints addressed, but strictly in terms of lease agreement obligations.
However, these landlord lease agreements will tend to be one-sided and building performance standards may not be clearly defined from the tenant perspective. But there are market indications that this status quo is changing – likely because there are many workplace accommodation solutions emerging not requiring long-term lease commitments.
But a word of caution, these landlords are performance driven. As markets become tighter, with less vacancy and multiple buildings controlled by fewer landlords, more aggressive negotiating stances quickly become apparent. But, once again, for an astute tenant negotiating timing can be used to advantage, if the context is understood. For example, a great time for lease renegotiations is immediately prior to a REIT giving a half-yearly or annual financial update – usually needing ‘good news’ stories to obscure more mundane financial performance and bolster share prices.