Tough economic times bring out the best and the worst in people. While the best will look laterally and creatively to maintain profitability, others resort to cutting costs in an underhand way.

Over the years, I’ve found some commercial landlords can resort to a few dirty tricks to squeeze more out of their business tenants.

A key area to be extremely wary about is the “fit-out” of premises. In some cases, the building owner and commercial tenant will negotiate both a basic rental, and a separate rental for works the landlord will carry out and fund for the tenant, such as new carpet, air conditioning and the building of the office layout.

For the most part, this can work out well for financially stretched tenants because the landlord pays the fit-out costs at the beginning of the lease and recovers it over the term of the lease. Unfortunately there are some unscrupulous landlords who use this as an opportunity to get one over their tenants.

It works like this. The building owner runs a separate fit-out company and insists that the fit-out is done by that company. The company over-inflates the price, which is then built into the tenant’s rental.

Or the landlord has a close relationship with a fit-out company and negotiates a large commission. The company over-inflates the price to pay the landlord’s commission, which is then built into the tenant’s rental.

There are even a few who, on top of the inflated price, use inferior or substitute products in the fit-out, such as lower grade carpet, and paint, or downgrade the specification – such as walls being painted once instead of twice.

Just a couple of months ago, I dealt with a situation just like this in premises in the lower North Island. The branch manager found his chair digging a hole in the carpet three months after the fit-out! We were brought in after the event and found that the landlord had substituted an inferior carpet and sought to get away with the savings.

These sorts of details need to be worked out carefully when a lease is negotiated. Commercial tenants need to be sure they know what they are paying for when it comes to a fit-out and how it is being financed.

Chief financial officers I talk to say it gets tougher each year to keep on top of the details of their lease and fit-out terms and conditions. My advice to those negotiating commercial leases and fit-outs is to take the time or hire the expertise to go through the details with a fine tooth comb.

There’s nothing worse than being lumbered with an overpriced rental over a period of years and watching the finishing in your office deteriorate before your eyes!

This entry was posted on Tuesday 19th August 2008 and is filed under Property Leasing. Both comments and pings are currently closed.