Expert Advice: Avoiding Abusive Rent Hikes
It is well known among business owners settled in Phnom Penh that local landlords have a much-dreaded tendency to hike up prices when the lease contract comes up for renewal. The all-too-common rent review can mean a substantial increase in the cost of rent, and is likely to have an impact on a company’s business plan. Commercial properties such as restaurants and bars are regular victims of the practice, and we are all too familiar with the sight of such businesses being driven out of BKK1 because the prices that they were paying at the beginning of their contract double (or more) five years down the road.
To save you more than a headache and perhaps even help keep your business afloat, the B2B team of writers met up with some of the leading personalities in the real estate industry and asked them for their invaluable advice: What can business owners do to protect themselves against disproportionate price hikes upon expiration of the lease?
- Consider your own business goals
“In order to get the best deal out of a lease contract, business owners need to carefully consider their business plans and lay out their expectations,” advices Quynh Nguyen, the sales manager for Urbanland Asia Investment. The Vietnamese real estate professional believes that SME owners need to match the projected lifespan of their business with the duration of the lease agreement.
Or, in other words, try to take the longest lease possible, which brings us to the next piece of advice:
2. Try to secure a longer lease, but include an early termination clause
“Longer term leases are preferable to secure good rental prices,” insists Nguyen. Chokmealy Chy, CEO at Bonna Realty Group, is of the same mind: “Take a longer lease. Cambodia does not have a standardised rate and the government has no say in regulating prices. Because of that, the owner can do what he wants,” the Cambodian property expert explains. For Chy, it is imperative that business owners take matters into their own hands and try to secure the longest lease possible, as the authorities will not impose price ceilings to stop greedy landlords on their tracks.
If you manage to get a longer term lease, Nguyen recommends to push for the inclusion of an early termination clause, as it will grant you peace of mind should things turn awry.
3. Negotiate an option to extend and don’t forget to include a price cap
Grant Fitzgerald, General Manager at IPS Cambodia, says that the best way to mitigate big price increases is to negotiate an option to extend the contract once it runs out. “For example,” Fitzgerald says, “your contract might be for five years, but you could try and add an option to extend it for three or five years more.” A 5 + 3 or 5 + 5 contract, as they are known in industry jargon, is, according to the Australian manager, your best bet.
To protect yourself, you need to top that up with a price cap for the extended period. “You need to add a clause stipulating that the price for the extended period will remain the same,” Fitzgerald says.
4. Squeeze in a fixed yearly rent review
In mature economies, it is common practice to have yearly rent reviews linked to the actual rate of change in the Consumer Price Index (CPI). However, that is not the case for Cambodia. To help you dodge abusive price hikes, Amaury Payen, a valuation manager for Knight Frank Cambodia, has an insightful piece of advice: “I would advise tenants to negotiate a fixed yearly rent review.”
5. And study the lease contract carefully before signing it
The last word of advice coming from our experts might seem obvious, but it is something that, in the rush of things, many end up neglecting. “It is imperative to study the lease contract carefully before signing, including all conditions,” Nguyen says. Basically, do not sign anything until you have meticulously study every clause. Payen also recommends scrupulousness when the time comes to sign the contract: “Small business owners should clearly define the terms of the renewal conditions within the lease agreement,” he concludes.