About two million U.S. businesses renegotiate a lease every year. Most tenants prefer to stay put in their current location, because moving is a not only a hassle, it is expensive, may inconvenience employees or cost a business an established clientele.
Most business tenants don’t have the in-house expertise to renegotiate a lease renewal favorable to own best interests and attempting to strike a deal without enlisting the aid of a lease renewal expert can be costly for tenants.
The two types of professionals have expertise in renegotiating lease renewals: tenant brokers and lease renewal consultants. The difference between the two is a matter of cost and trust.
A lease renewal consultant, such as Renegotiate Lease, charges a flat fee and often can get a landlord to agree to pay all or part of it. On the other hand, the landlord pays the broker a commission on the overall deal, but may raise the tenant’s rent to recoup this expense. This arrangement creates a conflict of interest that may make a broker reluctant to push as hard for lease provisions favorable to the tenant as a lease renewal consultant, which works solely for the client to secure the best deal possible.
In today’s tight real estate market, office and warehouse space is garnering record high rents. But that doesn’t always mean renewing tenants will have to pay the market rate. Landlord prefer the known to the unknown and don’t want to lose a good, creditworthy tenant. Releasing empty space is also costly in terms of marketing and lost rent.
A skilled tenant rep employs strategies that may even result in a rent reduction or free rent and tenant improvements generally only offered to new tenants. For example, touring other nearby properties and soliciting proposals for similar space provides leverage for the tenant rep in negotiating with a landlord.
Meanwhile, retail real estate is softening as e-commerce continues to capture a bigger share of sales and forces brick and mortar tenants to downsize, close some locations, or go out of business entirely. A clever tenant rep is aware of motivated landlords willing to re-purpose retail space for other uses. A change in use can result in extremely competitive lease agreements for office, special-use and industrial tenants occupying the space.
Lease Renewal Do’s and Don’ts
1. Begin the process early. The first and most important step in renewing a lease is to start the process at least 12 months – preferable 18 months – before the lease expires by hiring a renewal consultant or tenant broker.
2. Assess your situation. How would other landlords perceive your company? Have you been a good credit tenant that always pays rent on time? Is the location imperative to your business’ success, like in the case of an established restaurant or bar with a regular clientele? Would moving to a new location inconvenience employees or cause you to lose customers?
3. Think about business changes that could affect your space over the course of the lease and what length of lease makes the most sense. If in expansion mode you might want the option to move to a larger space. Maybe your online sales are increasing every year, while in-store sales are declining so you want to preset the early termination penalty if you downsize or exit the space early or include an clause that allows a sublet.
4. Prepare for the interview with your tenant representative. Make a list of what you want out of negotiations. Free rent and space improvements? New tenants often receive these goodies, why not you? Maybe you want a clause that forbids the landlord from renting space in the project to a competing business. Lower rent, the same rent or a below market rent? Maybe you want more parking or free parking?
5. Also list any space modifications or updates you want to make. Does the space need new paint and carpet? Maybe you want to reposition it as open, collaborative space and add outdoor spaces with amenities? Does an appliance like the dishwater in the break room need replaced? Maybe you want to remove walls between a couple offices to create a conference or break room
6. Tour other suitable properties with your tenant representative to find out what else is available and what those landlords would offer. This provides the tenant representative leverage when renegotiating the lease.
1. Don’t exercise an option in the original lease to renew, especially if the renewal term’s rental rate automatically increases or can’t decrease.
2. Don’t wait until the last few months before your lease expires to start the renewal process. You need to be on top of things- setup an alert in you smartphone calendar to remind you 12 to 18 months in advance of the lease expiration. The landlord will often wait until the last minute to remind you of an expiring lease, when there isn’t time to look at other possibilities.
3. Don’t try to renegotiate a lease renewal without the help of professional expertise.
4. Never sign anything until you’ve discussed the landlord’s proposal and thoroughly reviewed the proposed lease with a professional: a renewal consultant, tenant broker or attorney.
5. Never discuss your business’ success with your landlord. Such information could cause the landlord to raise the rent.
Jonathan B. Ferrini, an expert in negotiations, heads NegotiateLease, a tenant lease renewal consulting and advisory service.