Before You Sign: What a Shopping Centre Lease Offer Actually Commits You To

Most first-time tenants think the fitout budget gets decided when they sit down with a shopfitter. It does not. It gets decided weeks earlier, in a two page lease offer that looks like a rent negotiation and is actually a construction contract in disguise.

At Behe Constructions we get called in after the offer is signed roughly nine times out of ten. By then the demarcation is fixed, the contribution terms are locked, and the things that would have saved the tenant thirty or forty thousand dollars are no longer negotiable. This post covers what is actually in that offer and what it costs you.

This is part 1A of a ten part series on opening your first store in a shopping centre. Part 1B covers the legal rights you have before you sign, which is a separate conversation and a more valuable one than most tenants realise.

What the landlord actually gives you

The landlord hands over what the industry calls base build, or a cold shell. In a Sydney centre that usually means:

Item	What you typically get
Floor	Smooth concrete slab, screeded to level, no finish
Ceiling	The base building ceiling runs through the mall and stops at your lease line. Inside the tenancy is open to structure
Air conditioning	A main duct or spigot at the boundary, no distribution inside your tenancy
Fire services	Capped sprinklers at base building spacing, not to your layout
Hydraulics	A water supply point and a sewer connection point, capped
Electrical	A supply point, sometimes a distribution board, sometimes not
Shopfront	Nothing. The mall floor finish stops at your lease line

Everything past that boundary is yours. Distribution ductwork, sprinkler drops relocated to suit your ceiling, the grease arrestor, the waste points, the shopfront, the ceiling, the lighting, the joinery, the signage, the floor finish, the mechanical exhaust, and every certificate that proves it all complies.

The rough principle is that the landlord provides what any tenant would need and you provide anything that exists because of your specific store. That principle is useful for a sanity check and it is not what governs. What governs is the schedule in the lease and the tenancy fit-out statement. Two tenancies in the same centre can have genuinely different demarcations depending on who negotiated harder.

Where the line moves

The items worth arguing about, because they routinely swing twenty to sixty thousand dollars:

• Core holes. Penetrating a suspended slab for hydraulics needs scanning, engineering sign off and a licensed operator. Landlord scope in some deals, tenant scope in others.

• Electrical distribution board relocation. If the board is in the wrong corner for your layout, moving it is a five figure item.

• Grease arrestor. Food tenancies. Sometimes the centre has a shared arrestor with spare capacity, sometimes you are installing your own and finding somewhere to put it.

• Mechanical exhaust riser. Whether a kitchen exhaust path to roof already exists is the single biggest variable in a food fitout budget.

• Ceiling. The mall ceiling stops at your lease line. Everything inside is your scope, including the bulkhead that closes off the gap at the shopfront.

• Make good on exit. Signed now, paid for in five years. Part 9 of this series covers it properly.

  
  

Ask for the demarcation schedule and the tenancy fit-out statement before you sign, not after. If the landlord will not produce them, that in itself is information.

The fitout contribution, and how it really works

Landlord contributions are common and they are not what tenants think they are.

It arrives at the end. Typically after the Occupation Certificate is issued, all statutory and compliance certificates are handed over, the certificate of currency is lodged, the bank guarantee is in place, defects are closed out and you have opened and traded. Then thirty to ninety days for payment.

Run the numbers on a $350,000 fitout with a $100,000 contribution. You fund the whole $350,000 through construction, open the doors, then wait somewhere between three and five months for the $100,000. That is the working capital requirement almost nobody plans for, and it is the most common reason a viable store opens broke.

It is usually amortised, which means it can be clawed back. Most contributions are written down over the term. Default or exit in year two of a five year lease and you repay the unamortised balance. Sixty per cent of the money, at exactly the moment you can least afford it.

GST applies. A cash contribution is generally treated as consideration for a taxable supply by you as tenant. You issue a tax invoice and remit the GST. Budget the gross figure and you are short one eleventh of it. Get your accountant to confirm the treatment for your specific structure before you rely on it.

It may not be cash at all. Plenty of contributions are structured as rent abatement instead. The headline number looks identical and the cashflow effect is completely different, because rent free helps you in months one to six while a cash contribution helps you in month five at the earliest.

Turnkey deals, and the maths behind them

A turnkey or landlord fitted deal is where the landlord builds the fitout and recovers the cost through rent. In New South Wales this is expressly permitted, and the lease will usually carry a separate special rent line covering the cost of the fitout, fixtures, fittings and equipment the landlord installed.

The trade is straightforward once you stop seeing it as a fitout and start seeing it as finance.

The landlord is lending you the fitout cost and charging you back over the term. What they never tell you is the interest rate, because it is buried inside a weekly rent figure. You have to back it out yourself.

Take a $350,000 fitout, landlord funded, five year term, fully recovered through special rent:

Implied interest rate	Special rent per week	Total paid over 5 years	Multiple of build cost
6%	$1,598	$415,444	1.19x
8%	$1,686	$438,299	1.25x
10%	$1,776	$461,646	1.32x
12%	$1,867	$485,467	1.39x
15%	$2,008	$522,052	1.49x
20%	$2,251	$585,164	1.67x

Use that table in reverse. Ask what the fitout is costing to build and what the special rent component is per week, then find the row. If the answer sits above roughly 10% you are paying more than a bank would charge a small business on a secured facility, and you own none of it at the end.

	Turnkey	Self funded
Upfront capital	Nil	Full fitout cost
Specification control	Landlord's	Yours
Who owns the fitout	Landlord	You
Make good exposure on those items	Generally none	Yours
Speed to open	Faster	Slower
Cost if things go well	Higher	Lower
Cost if you have no capital	Available	Not available

For an operator with no capital and a proven format, turnkey can still be the right call. For anyone with access to funding it usually is not. Either way, compare total rent over the full term rather than weekly rent, and ask for the special rent component to be identified separately in the lease so you can actually see it.

The costs the centre bills you directly

These sit outside your builder's contract entirely, so they never appear on a shopfitter's quote and tenants consistently miss them. Indicative ranges for a 100 square metre food tenancy in a Sydney centre:

Charge	Typical range
Fitout bond or security, separate from the lease bank guarantee	$2,000 to $5,000
Design approval and plan check fees	$2,000 to $6,000
Hoarding supply, install and graphics	$3,000 to $10,000
Utility connection and metering	$2,000 to $8,000
Waste and bin levies during fitout	$1,000 to $4,000
Temporary power and water	$1,000 to $3,000
Dilapidation and condition report	$1,000 to $2,500
Fire and sprinkler isolations, per isolation	$500 to $1,500
Contractor inductions, per person	$50 to $150
After hours access and security escort	$80 to $150 per hour

Call it fifteen to forty thousand dollars before you have paid a builder anything, and it varies significantly between Scentre, Vicinity, Mirvac and single asset landlords. Ask the centre for its current schedule of tenancy fees in writing during negotiation. It exists, and it is rarely offered up unprompted.

There is a statutory angle here that is worth knowing. Under section 12 of the Retail Leases Act 1994, a lease provision requiring you to pay or contribute towards finishes, fixtures, fittings, equipment or services is void unless that liability was disclosed in the landlord's disclosure statement. So a charge that appears for the first time after you have signed is not automatically payable. Part 1B covers this properly.

Where people get burnt

The single most expensive mistake is treating the offer as a rent negotiation and handing the construction detail to a builder afterwards.

Rent is the number tenants focus on because it is the number on the front page. A ten dollar per square metre concession on a 100 square metre tenancy is a thousand dollars a year. Getting the mechanical exhaust riser moved into landlord scope is forty thousand dollars, once, before you have spent anything. Tenants trade away the second to win the first.

The fix costs nothing. Get a builder to read the demarcation schedule and the tenancy fit-out statement while the offer is still an offer. An hour of review during negotiation is worth more than anything that happens later, because after signing you are no longer negotiating, you are just pricing.

Before you sign, get these in writing

• The demarcation schedule, showing landlord works against tenant works item by item

• The tenancy fit-out statement or fit-out guide for your specific tenancy

• The centre's current schedule of tenancy and fitout fees

• Confirmation of whether a kitchen exhaust path to roof exists, for food tenancies

• The contribution terms, including amortisation, claw back triggers, GST treatment and payment timing

• The make good clause, and a dilapidation report of the tenancy as handed over

Next in this series, part 1B: the rights the Retail Leases Act 1994 gives you before you sign, including the one that caps what a centre can make you build.

Behe Constructions has been fitting out commercial and retail tenancies across Sydney for years, and we read lease offers for clients before they sign as a matter of course. If you have an offer in front of you and want a second set of eyes on the construction side of it, get in touch.