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Every tenant has a lease expiry date and must make a simple decision by that date: stay or go? You can either exercise your option to renew your commercial lease, or relocate at the end of the lease term.
While most tenants prefer to renew in their existing premises as it is much less painful than a relocation, there is still a strategic process to go through to ensure you are in the best possible position to renew.
Your lease expiry date is much like a far-out weight loss goal. Did not make it to the gym today? There is always tomorrow. The problem is when tomorrow never comes.
Most tenants are so deeply entrenched working in their business that they neglect to work on their business.
Most renewal rights (if you have a right) are 9-12 months notice. You may not be in a position to decide on a renewal that far in advance, but if the time period expires so does your right to stay. Most landlords would be willing to renew your lease, but you may have introduced new competition for your own space, as you do not have an automatic, legal right to stay in your space without the renewal right.
Even if you do not have a right to renew, 12 months is still a recommended guideline for when you should start the renew or relocate journey.
In the event that you either do not have a renewal right or the notice period has lapsed, keep in mind that the landlord may want to relocate you.
When leases are due landlords are typically mindful of how to play musical chairs to accommodate other expanding tenants. There may be a growing tenant in your building with eyes on your space. I have been involved in representing such growing tenants who know when other leases are due and as soon as the notice period lapses, we present an offer on those spaces.
Tip: do not count on your landlord to let you know of your notice date for renewal. It is of no benefit to them - they want competition for your premises. They want to satisfy growing tenants in the buildings and they want tenants fighting over spaces, which means they achieve higher rental rates.
The best way to deny other tenants who are keen to scoop you on your own space is to work out a renewal well in advance of the expiry.
If the market is soft the landlord may even be willing to reduce your existing rate right away as an incentive to sign now. The landlord knows that once you are very close to expiry you may have other landlords competing for your tenancy.
Information is power in any negotiation. If you attempt to negotiate a renewal directly with the landlord without a real estate agent he will know you are not taking a serious look at your alternative options. You are simply trying to work out a new deal without the cost of the middleman broker that has to be compensated.
But even average brokers can create leverage with their mere presence. They know what other options are available, what options are coming available, and most importantly how low rental rates are after negotiation.
Case in point: a law firm who leased most of a suburban building. They had their sign on top of the building. They met with 3 brokerage firms and interviewed them (translation: used them for information to do their own renewal).
The result was that the law firm felt comfortable with their renewal proposal from the landlord at $14, so long as it was reduced by $1 since the law firm decided to renew directly.
The landlord complied.
Too bad that other tenants in the building were renewing at $9.
If the law firm hired a broker and achieved the renewal all the small tenants with brokers were achieving, they would have saved $4 x 20,000 square feet x 10 years ($800,000).
Although you want to be mindful of the notice period for the option to renew (or option to extend), it should just be your parachute, you should not formally exercise it.
If you formally inform the landlord you are renewing the lease, two things are going to happen:
Exercising your renewal right is like a set of golden handcuffs; on the bright side you secure access to your space and eliminate any competitors that would want it.
On the other hand, you have committed and only after you commit do you find out from the landlord what the rate will be.
What if the landlord is unreasonable? While you will likely have an arbitration clause within your lease you still may have to go to arbitration and there will be not only a cost to that but it will be another headache while you are trying to operate your business.
Most leases specifically mention that your renewal right excludes any other incentives such as free rent and tenant allowances. These are goodies that are normally negotiable even on a renewing lease.
If the market rent is $30 with a $5 per square foot allowance and you trigger the right to renew, you may be stuck with a $30 rental rate without the $5 per square foot allowance.
Further, you may have some clauses in your lease you agreed to in the past that you would like to improve. Perhaps you agreed to a makegood provision that you want removed, or you want to get that personal guarantee removed.
Those clauses are off-limits if you trigger your option.
Instead of triggering the renewal right, simply craft an offer to lease, letter of intent or offer to amend and extend lease just try to work out a new deal.
Exercising your option to renew should be a last resort.
Hopefully you managed to do an OK job on the first go around and there is not much to clean up on your lease renewal.
Here are a few common items to consider:
Base Year: The base year should be updated to reflect the year in which the new lease is signed. Otherwise this could be a significant hidden cost.
Security Deposit: Did you have a security deposit or was it first and last? If it is a security deposit, ask if it can be applied to the renewal term.
Improvements: If your space needs some work, ask for a tenant improvement allowance. It will probably show worse once you move out your furniture so a replacement tenant will probably ask for a higher allowance.
Expansion Rights: Ask what spaces in the building are coming up for lease and what options you can negotiate for first rights to expand into them.
Renewal Option: Ensure that even though you are not triggering the option this time around, that you want a further right to renew for the next expiry. Just in case.