Office Fit Out - Who Pays?

You’re planning to open a new office and are scoping for new properties. You find a great space in the perfect location with great amenity. Now for the office fit out.

An office fit out - building the interior of the property to suit the needs of your organisation - is an important part of commercial property and your business finances.

Whether the property owner pays or the tenant covers the costs for the office fit out depends on the lease agreement, and what was negotiated.

It is important to understand the financial aspects of the lease agreement during the negotiation process, particularly the Incentive & Owners Works clause as this typically covers off any works the Owner has agreed to undertake to the current office fit out, along with how the incentive can be structured (i.e. to fund a fit out).

This should be made clear so both parties understand their liabilities and responsibilities before signing the lease, undertaking any works, or moving in.

What Is An Office Fit Out?

An office fit out involves designing and building the interior spaces of the leased area. This can include everything from creating the office space from the bare walls and floors with no services infrastructure (to having the basics in place and merely adding partitions or workspaces as required for your organisation (warm shell).

A great office space combines important functional and performance considerations, including energy efficiency, sustainability and technology.

It also impacts on the wellbeing and productivity for employees, so it is important to make sure all aspects of the fit out are considered.

When planning the space, think about how many people will use the space and how they will move around it, what electrical and physical installations are needed such as computers and lighting, whether people will work at workstations or in offices, how many bathrooms and other facilities are required, an appropriate colour scheme and signage, and ensuring health and safety compliance. In today’s market, its also important to work through any potential “Work from Home” policy (if any), as this will impact the number of staff and workstations required.

Office Fit Out: Lease Agreements & Negotiations

It is important for both the landlord and the tenant to carefully consider the lease agreement before starting any office fit out.

This legal document outlines the responsibilities and obligations of each party and is crucial to avoid misunderstandings, conflicts, and unexpected costs that could derail the process.

The lease agreement is the foundation for negotiating the allocation of office fit out costs. During the negotiation process, the financial aspects of the fit out should be discussed and documented within the lease agreement.

This includes determining who pays for the office fit out design, construction, materials, or any necessary modifications to the premises, including those that may occur down the track or even to the base building services such as air conditioning and fire services.

It can also include timelines, processes and any penalties for breaches.

Landlord Responsibilities For Office Fit Outs

Sometimes the property owner will pay for and manage the office fit out under the incentive . The contribution to these capital works can be a tax deduction for a landlord.

Don’t mistake base build works for “warm shell” handover for specific fit out works. When an Owner hands over a tenancy in warm shell, that typically includes carpet, perimeter walls painted, and a ceiling with air conditioning, lighting and fire services.

Cold Shell effectively means no flooring and no ceiling services, and only perimeter walls.

In today’s market its comment the property owner to offer a set fit out allowance within the lease agreement (via the incentive clause). This can be used to customise the space to the needs of the organisation and can be coordinating via the Landlord or via your own preferred fit out contractor (pending negotiation).

There may be limitations or conditions associated with the landlord's responsibility for the fit out costs, ranging from the amount of allowance to the scope of the fit out. This should all be spelled out in the lease agreement.

Tenants’ Responsibilities For Office Fit Outs

In other situations, the tenant leasing the property may be responsible for its fit out.

This could involve renovating a pre-existing office space to meet the business needs. This would require the layout design, internal fittings and fixtures, and the installation of equipment and furniture. Through this process the tenant can control the cost, efficiency and design of the equipment. Office furniture and equipment can also be claimed over its life as a tax deduction.

While having control over the fit out allows for the unique customisation of the space, tenants should consider their budget and plan accordingly.

Communication & Documentation In Lease Agreements

Clear and open communication between the landlord and tenant about who pays for the office fit out is important. The lease agreement should set the foundation for all the terms of the fit out, including costs, timing and what happens in the event of a break lease. This can include possible tax implications or the repayment of any incentive for both parties.

Having all this detailed in writing can avoid legal disputes while providing clear guidance for everyone. This can include budgets, scope of work, timelines, and any conditions or limitations.

Regular communication throughout the process enables the landlord and tenant to stay informed about the progress, address any concerns or changes, and make necessary adjustments in a timely manner.

Planning an Office Fit Out

An office fit out plays a critical role in the functioning of your business. The surroundings of your workers is a physical demonstration of your work, and sets the tone for its operations.

When planning a new office and negotiating the lease agreement, make sure the office fit out is discussed in the negotiation.

Who pays for the design and building of the interior spaces can have implications for both parties, in terms of the financial cost, the usefulness and efficiency of the space to a business, and potential legal ramifications.

Whether the landlord or the tenant pays for the fit out costs depends on the lease agreement in place. Clear and open communication between the landlord and tenant, along with documenting agreements and responsibilities in writing, ensures a smooth fit out process and helps avoid disputes.

Want to find out more about negotiating a commercial property lease, or who finances fit outs. Aegis Property Group agents have been leasing in the Brisbane area for 25 years. They know property from entry to exit. Contact us today!

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