Over the past five years, public institutions have leased more than 400,000 sqm of office space in Poland’s key markets, primarily in Warsaw. However, due to their specific nature, state institutions are not typical tenants. As a result, finding the right space and negotiating lease terms can sometimes be a time-consuming and complicated process, according to Marcin Kowal, Associate Director, Office Department, Newmark Polska.
Having found the right location, public institutions and their advisors typically face an equally daunting task: drafting a precise lease agreement. “At this stage, it’s essential to ensure that the agreement includes clear-cut provisions detailing what the tenant is responsible for paying and how those payments will be accounted for. Another challenge is anticipating as many potential future scenarios as possible and safeguarding the tenant’s interests should they materialise. While it is difficult to predict all variables, a professional advisor with experience in leasing transactions will be able to specify key provisions and refine details that need to be addressed or corrected in the lease,” says Marcin Kowal, Associate Director, Office Department, Newmark Polska.
Rent currency
Rent currency is a relatively common point of contention in lease negotiations with state institutions. Most office landlords – particularly those relying on euro-denominated loans – require that rent be expressed in euros, in line with their financing banks’ requirements. Meanwhile, state institutions typically prefer transactions in Polish zloty. “Contrary to common belief, state organisations are not legally required to settle payments in Polish zloty. The obligation to express or pay a monetary liability in Polish zloty ceased to apply on 24 January 2009. Despite this, public institutions remain reluctant to accept other arrangements, as settlements in the national currency, on which the state budget relies, are more convenient and eliminate the risk of exchange rate losses,” says Marcin Kowal. The expert also explains that an exchange rate cap can help mitigate foreign exchange risk. This involves including a lease provision that sets limits on exchange rate fluctuations, with any rates beyond those limits disregarded when calculating payments. Another option is to denominate lease rent in euros but convert it into Polish zloty based on the exchange rate on the pre-invoice date. Alternatively, the euro rent can be recalculated into zloty using an average exchange rate, for example, the 12-month average, and that amount can be entered in the lease in the Polish currency.
Break option as a safety net for the tenant
Another equally important aspect of lease negotiations is the inclusion of a break option clause – the tenant’s right to terminate the lease early. With lease terms currently ranging from seven to ten years, many public institutions are eager to secure the option to end the lease before its full term.
“Property owners find this option difficult to accept. Most are investment funds, for which a building is an investment product with a fixed and secured rate of return. Additionally, state institutions do not invest in third-party fixed assets, such as office fit-outs, meaning landlords are fully responsible for these costs. Fit-out costs are typically spread over the entire lease term, making the break option disadvantageous for landlords,” explains Marcin Kowal, Associate Director, Newmark Polska.
What could the landlord and tenant do in this case? “The most commonly used clauses require state institutions to cover the costs of early lease termination by reimbursing the undepreciated costs of space fit-out, redevelopment or adaptation. Another option involves contractual penalties, which may amount, for example, to six months’ rent,” explains Marcin Kowal. “Early lease termination is always a challenge for landlords. This is why leases frequently include detailed and complex clauses limiting break options. One special case involves the statutory liquidation of an institution without the appointment of a legal successor. In such situations, where the lease is guaranteed by the State Treasury, the landlord may exceptionally agree to an early termination clause. However, this requires from the landlord a special assessment of the risk of such a scenario materialising in the future.”
Cost control: Specify what you will not pay for
No less important to state institutions is maintaining control over rising service charges. The list of items classified as service charges is typically open-ended and may include additional expenses, depending on changing market conditions and legal regulations. “Recent years have shown that service charges can increase significantly over a short period. That’s why we recommend that our clients include provisions giving them control over costs throughout the lease term. One solution designed to protect the tenant’s purse is to cap cost increases – for example, limiting annual growth to a maximum of five per cent or the average cost of a given service in comparable buildings within the same city. Naturally, this would apply only to expenses that fall under the landlord’s control. For companies working with us, we also prepare additional lease schedules that clearly specify which costs cannot be classified as service charges. For instance, capital expenses related to building upgrades should always be borne by the property owner,” says Marcin Kowal.
Who will pay for extra services?
One reason public sector institutions choose to lease commercial office space is the opportunity to negotiate additional services. As part of lease agreements, they increasingly seek to secure contributions towards relocation costs, office cleaning, coffee for employees, office furniture and certain IT installations and hardware. “Most property owners do not offer these services as standard, so to meet occupier requirements, they engage external suppliers. When advising tenants, we support them throughout the entire process – including the selection of subcontractors. We analyse the market and help them choose the most advantageous offers, knowing that for state institutions, what matters is not only the price but increasingly also the quality of services,” says Marcin Kowal, Associate Director, Newmark Polska. “The acquisition of office space for state institutions is a specialised process that requires meticulous analysis, expertise in market research, an understanding of a property’s specifications and ownership, and detail-oriented negotiations. Landlords who will offer additional services as part of lease agreements with public institutions will certainly gain a competitive advantage in the market,” concludes the expert.
