What does a commercial property manager look for when inspecting a property?

In this case I will use the example of a retail strip shop. There are other matters to consider when you are assessing industrial, medical, showroom and office premises for example.

1.       Streetscape.

Before I step inside I consider these issues:

Is the street busy or quiet?

What is the parking like?

Are the neighbours household names that stand out, are of good quality and well presented or just average? Are there banks nearby? Retailers still need to deal with cash.

What is unusual or attractive about the building I am inspecting such as heritage features.

Does it have a wide frontage or is it on a corner?

Is it in the prime part of the street or on the fringe?

How well is it maintained and what is the overall impression? Is the shop front, display, signage or seats out front clean, well maintained and orderly?

 Is it inviting for customers or would you hesitate going inside?

2.       Internal layout and condition.

How is the shop arranged and presented? Do I have a previous report to refer to?

Is it clean, neat and orderly with reasonable stock levels or sparse and untidy?

Are there exit lights and extinguishers? Are they on and working? If you have an essential services report in your file then it is worth checking to see that all is in order. Are there exit doors and do the locks appear to be compliant rather than covered with illegal panic bolts or deadlocks? Are exits and paths to exits clear? Are goods stored that may be flammable?

If the premises are suited for food, there may be supplementary fire systems such as smoke detectors and fire blankets. Are these working? Are any flues and fans present subject to regular cleaning and is this documented? If you have a copy of the insurance renewal certificate, check if there are conditions. It may prohibit deep frying yet before you on a bench is a deep fryer! You may need to advise the tenant to remove it.

What is the electrical switchboard and wiring like? Sometimes the switchboard can be hot or emit a burning smell. If so, the power usage is probably at the limit and it should be checked further. Multiple extension cords are an example of the power supply also being at its limit.

Take lots of photos.

3.       Check the fixtures, fittings and chattels in the lease.

Are they in good order and condition? Is the air conditioning being maintained and is there  a service agreement? Are any items in the lease missing or damaged? If the floor coverings are listed in the lease, are they clean?

4.       The tenant.

Is the tenant the actual person you are meeting or an employee, friend or relative? There can be occasions where the tenant is overseas allegedly or has left and has sold the business without advising you, so ask if this is not clear. You want to avoid any purported transfer of the lease by stealth.

Is the tenant using the property for the permitted use? In a small shopping centre or arcade, if the tenant is a hairdresser for example and offers a nail or makeup service, check the status of any exclusivity/prohibition clause in the lease. Otherwise, disputes may occur if there is a nail salon or beautician nearby. Check to see if the tenant is using or has sublet upstairs or the rear of a property for residential use which is not a permitted use. The insurance cover for the property may be invalidated and the building may change from a Class 6 to a Class 4 building under the National Construction Code and require additional fire safety compliance.

If the tenant is using the property for an unrelated use then they may require a new or amended permit as the use may be a prohibited use. Again, it may also void the insurance held. Are there any areas that you are not allowed to access? If you are refused access you will need to demand access at another time to ensure that there is no illegal activity. If the property is unclean, the tenant has to schedule a cleanup and a follow up inspection is needed.

I always seek to engage with the tenant and ask how business is. If they say great and the shop is empty, weigh that response up. Mostly it will only be o.k. as they do not want an admission that it is going well to bring on a rent review. It is always important and not just an issue of courtesy to have a chat to the tenant if you can. It is a common complaint from tenants that they never see the agent.

Whilst you are in discussion, try not to get into or start an argument (to the uninitiated, this does happen) and keep the conversation cordial. Otherwise your time spent on site will increase and likely be time wasted and divert your attention.

Make sure you talk to the occupants about what is happening in the area as you can obtain leads regarding other shops becoming vacant, owners wanting to sell, tenants on the move or other useful information.

If there is a decision to be made such as renovation works or renewing the lease, a face to face discussion is usually the best way to reach agreement.

5.       The property itself.

I like to make sure everything is maintained. If the roof leaks it has to be fixed. Are there trip hazards or stairs and paths with inadequate steps and rails? Are fences, gates, spouting and downpipes in good order? Is the garden neat or overgrown?

Is this the highest and best use for the property? Is the tenant the right fit in this location or are they on the way out and a better tenant could be found? Can the building be developed or an extra floor added on? If so, you may want a demolition clause in the lease if this action is contemplated in future.

Have any works been done that you are not aware of such as the installation of a satellite dish on the roof, other roof penetrations or renovations without a permit or consent? Shortcuts taken will usually indicate that renovations are not right or have not been undertaken by qualified tradespeople.

6.       Feedback to the client.

A report with photos, commentary and recommendations are always welcomed by clients. It’s up to you how much information you wish to include. I try to keep the inspection to 20 minutes for a property of this type but that can be longer if there are issues to resolve.

Is a break clause better than a lease option?

Most tenants when committing to a lease, seek an option(s) to ensure long term stability or to have the ability to sell their business at a later date. Changes proposed this year in the Retail Leases Amendment Act will see a cooling off period after an option is taken up and provide the ability to a tenant to walk away from a lease if the rent assessed is not to their liking. The practice that has stood for decades is one where parties who do not agree on a rent for the commencement of a renewed lease can have the rent determined by an independent valuer acting as an expert. This will be turned on its head and will be problematic for both parties as follows:

 1.  Investors may be reluctant to give options as they become problematic.

  2. Tenants will lose the security that comes with additional options as landlords become                    resistant to offering them.

  3. The potential exists that following a rental determination which can occur months after the 
      lease renewal date involving considerable expense, the tenant can still walk away from the            lease.

  4. Uncertainty is therefore created.

An alternative may be a long lease with a break clause.

A lease could run for 10 years for example with a break clause at year 5 with the tenant having a window say 6 – 9 months prior to the 5 year break point to give notice if they wish to move out. There may or may not be a market review at that point. There is no requirement to notify the tenant of the break point once the lease commences, both parties have certainty and the lease continues if the tenant does not provide notice within the required time frame.

Will this catch on or will it be thwarted by section 94 of the Retail Leases Act 2003 The Act prevails over retail premises leases, agreements etc? No doubt the property industry will be looking at this issue in greater detail over the course of this year.