Updated: May 5
In real estate, we often say no two deals are the same; in that case, two leases from two different markets are world's apart.
In commercial real estate, one of the challenges when moving between markets is becoming familiar with different lease document standards. While no two deals are the same, two deals in two different markets are markedly different – and I am not just talking about language. When I worked in Korea, I did not know the minutia of a foreign language lease because I didn't speak the language to that degree; I would focus on the commercial terms during the negotiation process and, like many MNC clients, rely on a lease abstract prepared by the team after the lawyers hammered out the exact wording of the final lease. In Australia, where leases are of course in English, I look forward to being more involved in the process more often.
Although I did not often handle the lease legal review process overseas, I can still confidently say that leases in Australia are far more complicated and thorough; they definitely have more pages and cover many eventualities. As I have been reviewing leases and familiarising myself with the local market practices, I came across one dispute-resolution mechanism which explained what would happen in the event that the two parties cannot reach agreement, and a determining valuer is appointed, and that valuer then dies. Talk about covering your bases!
Spoiler alert, the mechanism involved appointing another valuer, and did not mention anything about the funeral arrangements.
Leases are not only shorter (in terms of pages) in many Asian markets, they are in many respects more flexible. In Korea, some property owners undervalue flexibility and are more likely to agree to no-or-low penalty termination rights while remaining firm on the headline rent. Landlords in Australia are far more inclined to recognize the value of flexibility from a tenant’s perspective and negotiate on other matters accordingly. Leases across Asian markets are generally shorter (the length of the term), as well, although this is changing as the increasing flow of global capital sees Western owners’ practices and preferences leak into Eastern markets.
While a lease can be easier to terminate, the lack of a developed sub-leasing market in Korea means that it is extremely difficult to find a replacement tenant to serve out the remainder of the lease if needed – let alone getting the landlord to agree to an assignment of the lease responsibilities. In Melbourne, like most developed markets, sub-leasing is extremely common. That means tenants can make decisions about their long-term accommodation needs with some degree of confidence that they can find a replacement tenant if they need to leave some space behind.
I think that the low vacancy market in Melbourne is also a factor in this – when vacancy is low, you have a better chance of finding a sub-lessee and the chances are that you can sub-lease the space at a rate which is higher than the passing rental (because in a low vacancy market, rents are typically rising). Conversely, the Seoul office market experienced relatively high levels of vacancy in the past decade, with rising incentives for the most part. This means that not only would a potential sub-lessee have other alternatives to consider (such as direct leases), those other options are likely to be cheaper than the sub-lease option (unless the sub-lessor is willing to subsidise the rent). This has probably played some part in inhibiting a burgeoning sub-lease market developing in Seoul.
Markets across Asia Pacific provide leasing incentives, although Australia probably has the edge in terms of giving tenants more choice. Tenants in Melbourne typically receive an incentive amount in dollars, usually calculated as a percentage of the total lease cost. They then usually have the option of receiving the incentive in the form of rent-free months, rent abatement (a discount to rental spread evenly across the lease, or applied each month until the discount runs out), contribution to fit-out, or some combination of the above. In Korea, most landlords (if they offer incentives) only provide rent-free months, and a few separately provide a fit-out incentive (most don’t). The one notable exception to the rule in Melbourne is private owners: many prefer to preserve cash flow and may therefore favour rent abatement spread over the lease term.
Understanding the ins-and-out of leases – and where value-creation opportunities exist in negotiation – is a critical part of the tenant representation process. Leases in developed markets are more complicated and prescriptive than those in less mature markets, and this can at first glance appear to be more favourable to landlords. However, the complexity and detail of the documents also provide more opportunities to preserve certainty and generate value, which is likely to serve the tenant’s best interest in the long-run.