Get organized and do your homework. Begin the lease renewal process a minimum of 12 months in advance. You can’t start too soon. In most cases, you should not need to exercise your Lease Renewal Option Clause provided there has been a dialogue with your landlord and it has been established that the landlord wants you to stay for another term. Since most commercial tenants don’t know who their landlord really is, your homework includes research (perhaps on the Internet) to learn more about him/her.
Prepare for the Battle. When The Lease Coach begins to negotiate a lease renewal for a tenant, we initially review the lease document which was signed five or 10 years ago. You may have provided a personal guarantee, letter of credit, deposit, etc. and these terms can be renegotiated during the lease renewal process. If you simply exercise your lease renewal option clause, often the rental rate will go up and the tenant will forego the opportunity to negotiate on other important terms.
If a rent reduction on a lease renewal is justified either by a change in market rents for the area or a decline in sales revenues for the tenant you should be prepared to show Profit and Loss statements. We also like to show the landlord industry articles, trends, or other supporting information about your industry and how it is doing in the marketplace.
Talk to Other Tenants – Specifically, Tenants in your Building. Valuable information can be gathered by talking with your neighbouring tenants. We will interview tenants to share information and to determine their future plans. If other tenants are not planning to renew their lease, thereby creating more vacant space in the property, you will have more leverage. If another tenant has renewed his/her lease, the rental rate he/she agreed to pay will likely factor into the rental rate the landlord expects you to pay.
Create Competition for your Tenancy. So many commercial tenants go straight to their landlord regarding their lease renewal. At The Lease Coach, we like to create competition for our tenant clients. Instead of handing over your lease renewal to your landlord on a silver platter, we find alternative locations and solicit lease proposals from other landlords as a means of making your existing landlord re-earn your tenancy.
Approach Your Landlord and Your Property Manager. Confirm your landlord contact and make sure you are negotiating with the right person. You may have entered into the lease agreement negotiating with a commercial real estate agent for the landlord’s in-house representative; however, most lease agreements are negotiated with a property manager who you may or may not have a good, bad or otherwise relationship with.
Obtain the Landlord’s Lease Proposal. We don’t believe in negotiating on the first date but prefer to discuss and dialogue the lease renewal with the property manager and invite the initial renewal proposal. This puts us in a position to counter-offer and negotiate on behalf of the commercial tenant we are working for. Most of the negotiating process will take place verbally – but only after the lease renewal proposal or document has been provided by the landlord.
Submit the Counter Offer to Your Landlord. Multiple counteroffers from both parties are part of the lease renewal process. If you try to slam-dunk the lease renewal too quickly your attempts for a rent reduction will probably fail. We recently negotiated a lease renewal for a lawyer who was pleasantly surprised how effective this was. We deliberately slowed down the process and renegotiated every single term in the formal lease agreement that needed to be revisited.
Negotiate, Negotiate, Negotiate. Negotiate to win. Most commercial tenants are not negotiating to win at all … they are negotiating not to lose. The landlord and/or the landlord’s representatives are negotiating to win and you must do so as well. That might require creative thinking. You might want to start at $15.00/square foot and go up to $18.00/square foot over time. While we are negotiating, we will physically reveal the other offers which have come to me from other locations. Even if it is a more expensive deal, remember, that if you leave, the landlord gets a vacant property. It is extremely expensive for a landlord to replace an existing tenant. By the time a landlord pays real estate commissions (which could be $15 – $25,000), change the look of the unit, put in tenant allowance money and so on, it gets very expensive.
If the landlord is giving lease inducements (e.g. free rent and/or tenant allowances) to attract new tenants moving in, we believe that the landlord should offer those same incentives to you to entice you to stay. You are the repeat customer. You have the track record of paying rent.
With effectively knowing how to negotiate a lease renewal rent reduction, you will keep your profits rather than hand them over to your landlord. And isn’t that better for your own bottom line?
For a copy of our free CD, Leasing Do’s & Don’ts for Commercial Tenants, please e-mail your request to DaleWillerton@TheLeaseCoach.com.
Dale Willerton and Jeff Grandfield – The Lease Coach are Commercial Lease Consultants who work exclusively for tenants. Dale and Jeff are professional speakers and co-authors of Negotiating Commercial Leases & Renewals For Dummies (Wiley, 2013). Got a leasing question? Need help with your new lease or renewal? Call 1-800-738-9202, e-mail DaleWillerton@TheLeaseCoach.com or visit www.TheLeaseCoach.com.