our client’s need
In mid 2017, Mills Oakley’s rapid expansion into the top 10 of Australian law firms resulted in it outgrowing its Sydney office. To maintain its growth trajectory, Mills Oakley estimated it would need about 60% more A-grade office space in the Sydney CBD core by the end of 2018. The options were:
- Secure additional, short term space close to 400 George St; or
- Move to a new office of about 5,500 sqm on a long-term lease.
Mills Oakley’s four existing leases at 400 George Street over 3,600 sqm expired in 2022 (a further 5 years). During 2017, the decline in the vacancy rate for Sydney’s CBD office market began to accelerate rapidly. There were limited suitable alternative options for Mills Oakley and rents were rising rapidly while leasing incentives were shrinking quickly.
Typically, Mills Oakley does not use external real estate advisers and it had begun to consider alternative options, including Barrack Place, 151 Clarence Street, Sydney, a new office building being developed by its existing landlord, Investa Property Group (IPG). IPG had offered to lease Mills Oakley 5 floors in the new development, however, after more than a year, the parties had not been able to reach an agreement.
Mills Oakley engaged Counsel to consider all options including Barrack Place. The Firm had a conservative approach to real estate risk and would not accept an unmanaged position in relation to the existing lease tail. In addition, its internal financial modelling had determined strict limits on forward financial commitments.
In the prevailing market conditions, these limits were extremely challenging.
Counsel reviewed all alternative options from long term, whole office relocations to short term additional space, close to 400 George Street and provided Mills Oakley with a summary of its options.
We also reviewed Mills Oakley’s existing leases which included a capped market review in late 2017. and concluded that the capped market review represented an opportunity because it resulted in 5 years of below market rent in a market of short supply. The remaining lease term could be attractive to a third-party subtenant or to the landlord, given the potential for reversion.
We leveraged the value of competitive tension, by engaging directly with landlords who could offer, either a short or long term solutions for our client.
We also engaged directly with Investa in relation to the Barrack Place option. This option was attractive because it offered suitable, new office space within a block of Mills Oakley’s existing office, however, the commercial terms exceeded Mills Oakley’s limit substantially.
After highly complex negotiations, Counsel finalised an agreement for lease on behalf of Mills Oakley for the lease of levels 7-12, Barrack Place (approximately 5,600 sqm).
On an adjusted basis, we negotiated savings of approximately $10.1 million (12%) over the term of the lease compared with the proposal at the time we were appointed and resolved the lease legacy at 400 George Street (approximately $15 mill), at no risk to Mills Oakley. The total cost was also approximately $3.75 million lower than Mills Oakley’s pre-determined, acceptable financial threshold.