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How to Negotiate a Commercial Lease in Cambodia

Posted by Clerissa A on October 25, 2019
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Ways to ensure your commercial lease protects you and covers all situations.

You’ve found a few good office spaces you like and now the objective is to obtain the best deal possible. Negotiating a commercial lease is an essential aspect of your business decision. Office rent comprises a huge chunk in the monthly expenses and plays a crucial role in the overall planning. When negotiated well, it will save you enough budget to buy extra office equipment, or allow that expansion you are planning. 

Cambodia is a country of opportunities, and many companies are joining the bandwagon in opening a business or branch in the Kingdom. It has desirable investment laws and relatively easy business registration processes. The first step in opening a business in Cambodia is securing a commercial lease or office space.

Do Your Research

Before even considering a specific office location, do your research first. Due diligence is required before actually going to the landlord for negotiation. Is the area accessible to public transport? If you are involved in the sales industry, is the office conducive to foot traffic? 

Always remember that rental price factors in supply and demand. Check if the office space is in a prime location. Are there other companies interested in the same space? Find leverage that you can use during the negotiation.

Commercial Lease Agreement

 

 

Key Factors When Negotiating a Commercial Lease Agreement

Aside from leverage, there are many factors to consider when securing your office space. You need to know your requirements first before approaching a trusted real estate agent. Here is a list of the important factors to check before negotiating.

1. Space requirement

First, determine how much space you need. Depending on your budget, allow some leeway and flexibility in terms of space. Calculate the usable square meters instead of the rentable square meters. The actual space you will be renting includes common areas like bathrooms and pantry. The usable space is what you are transforming into your office.

Shophouses and commercial villas in Cambodia generally have more floor space and are ideal for medium to large companies. However, it doesn’t have the amenities and corporate setting of spaces in office buildings. You need to be clear on what type of structure and setting you need before you look at available commercial properties.

2. Permission on the use of spaces

Any lease agreement has a clause that clearly defines how the property is going to be used. During the negotiation, try to broaden the allowable use of the property to allow any future expansion or alterations in the space that you are renting. Even if you don’t have any foreseeable plans, the lease should permit you to do all the legal and reasonable changes that you need. 

For big spaces like commercial villas, a broad permission clause allows you to sublet certain areas. It also allows you to use the space for a different purpose than initially agreed.

3. Terms of the lease

Lease agreements typically run for a year’s term or more. A longer lease will give you a lesser rental price, but this is not always advantageous if you consider the fluctuations in the property market. Although the rental rates for commercial properties in Phnom Penh had been stable in the last few years, that is not the case with other provinces. Price can surge as much as 500% (as the case in Sihanoukville), or dwindle depending on demand, recent development, or cancellation of planned projects.

When negotiating your lease, try to get a shorter-term with an option to renew clause. This clause will give you the flexibility of renewing your contract at a lower price when the demand is low. It will also allow you to get out of the lease if you think that the area is not the right fit for your business needs.

4. Rent increases

Rental price increases over time, and it usually happens yearly or during contract renewals. Property owners rarely agree on a fixed amount on a long term lease. The market value of a property increases over the years, and this is called capital growth. Capital growth is the increase in the value of an asset over time. In a country like Cambodia that experienced an economic boom and a surge in property value, this is a critical point to consider.

Negotiate a fixed percentage increase that will not kick in for at least two years, or until the next short term contract renewal. Ensure that the clause is in the lease agreement. A fixed amount or percentage increases will put a cap on the amount that your landlord can put on your rental fee.

5. Maintenance of common area

Check the lease agreement for a clause identifying the responsible party for the maintenance and repair of common areas. Property owners sometimes charge the tenants for cleaning services, building security, ventilation, and repair. Try to negotiate a fixed amount because extra charges can add up if not given a cap on the amount that you need to pay.

Also, check for the maintenance services that the owner is contracting. For most business owners in the Kingdom, it is easier and cheaper to employ a local instead of a private maintenance company.

6. Office furnishings and customization

Some commercial spaces comes already furnished. When negotiating an office lease, try to get out of the clause where it says that you cannot make any alterations to the design and structure. Over the years, you may need to repaint, change carpets, or reallocate spaces. Ensure that the lease allows for alterations without consent from the landowner. If permission is required, make sure it states that the owner cannot unnecessarily withhold consent for no justifiable reason.

7. Repairs and improvements

Look out for a clause that says the office space needs to be returned to its original condition at the end of the contract. If there is a stipulation like that, negotiate with the landlord to exclude normal wear and tear. Exclude pre-approved alterations, damages from natural calamities and/or unavoidable accidents that are not the tenant’s wrongdoing.

8. Ownership and subletting

Lease agreements typically run for a year’s term or more. A longer lease will give you a lesser rental price, but this is not always advantageous if you consider the fluctuations in the property market. Although the rental rates for commercial properties in Phnom Penh had been stable in the last few years, that is not the case with other provinces. Price can surge as much as 500% (as the case in Sihanoukville), or dwindle depending on demand, recent development, or cancellation of planned projects.

When negotiating your lease, try to get a shorter-term with an option to renew clause. This clause will give you the flexibility of renewing your contract at a lower price when the demand is low. It will also allow you to get out of the lease if you think that the area is not the right fit for your business needs.

9. Renewal options

As earlier stated, negotiate for a clause that allows the first choice in contract renewals and a fixed pricing or percentage plan. This clause will hinder the owner from accepting another tenant when your contract ends. It will also save you money in case of a market surge, which happens very often in the city and other commercial areas in Cambodia.

10. Right to first offer

Try to add a clause that will require the landowner to offer any additional space in the building to the existing tenant before offering the space to third parties. This clause will be beneficial for future company expansions. Some owners balk at adding this specific clause, and some hard bargaining is required. Having a right to the first offer will ensure that no competition can occupy the same space. It allows you to add additional office space as needed.

Find a Reputable Real Estate Agency

Ultimately, all the terms of the lease must be favorable to you as a tenant. There should be no stipulation that hinders your company’s expansion and future growth. If the property owner is balking at giving you any concessions, then it’s better to find available office space elsewhere. To negotiate an office lease in Cambodia as hassle-free as possible, hire a reputable real estate company to do the necessary research, due diligence, and negotiation for you.

Real estate agencies such as IPS Commercial are experts in negotiating leasing agreements. They know the average rental prices per area and can haggle the pricing with the owner for you. Instead of looking around for available spaces, they already have available listings. They can recommend the ideal space you need, based on the requirements that you provide. It’s the easiest way to secure an office location.

 

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