How to negotiate a lease renewal rent reduction for commercial tenants
Wednesday, June 11, 2014
When we speak at major North American conferences and franchise shows, we frequently advise our audiences on the importance of properly negotiating their lease renewals. With doing so, ample benefits await — often including a rent reduction.
Here are a few points to keep in mind:
Get organized and do your homework. Initiate the lease renewal process 9-12 months in advance for tenants leasing commercial space. In most cases, you should not need to exercise your lease renewal option clause. This is provided there has been a dialogue with your landlord, and it has been established that the landlord wants you to stay for another term.
Talk to other tenants in your building. Valuable information can be gathered by talking with your neighboring tenants 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 tenants go straight to their landlord regarding their lease renewal. Create competition for your tenancy. Instead of handing your lease renewal to your landlord on a silver platter, find alternative locations and earn your tenancy (even if you don't want to move).
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 renewal agreements are negotiated with a property manager with whom you may or may not have a good, bad or otherwise relationship.
Obtain the landlord's renewal lease proposal. We don't believe in negotiating on the first date. We prefer to discuss the lease renewal terms with the property manager and invite a proposal. This puts us in a position to counteroffer and negotiate on behalf of the 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 counteroffer 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 tenant who was pleasantly surprised how effective this "slow it down" strategy was. We deliberately slowed down the process and renegotiated every single term in the formal lease agreement that needed to be revisited.
We will also long remember another tenant (operating a Denny's franchise). We not only successfully negotiated a sizable rent reduction, but also saw an opportunity for him to purchase the building. Much to this tenant's delight, we successfully negotiated the selling price to less than half of the listed price and closed the deal.
Negotiate, negotiate, negotiate. Negotiate to win. Most 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. Remember, that if you don't renew, the landlord gets a vacant space. It is extremely expensive for a landlord to replace an existing tenant.
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.
Then, start counteroffering. A good boxing match doesn't go two rounds; it goes 8-12 rounds. Remember, this is not an event — this is a process. Some of the best deals take four to six months. When we counteroffer, we will often throw in a few red herrings — things that we don't really care about and can readily give away.
Negotiate and ask for more than you expect to get. We remember getting one tenant 12 months of free rent on a five-year lease term. When asked how we did this, we explained that we had asked for 18 months free rent.
Conclude the lease renewal process by signing the lease renewal document or, if it doesn't work out, you still have time left to relocate. Ideally, you have done all of this in six months and given yourself a cushion.
Often, we negotiate lease renewals for tenants up to 24 months in advance and get rent reductions as well. You don't have to wait until the end of your lease term and if your landlord is stalling you, this generally means that he's got a rent increase in mind for your renewal term.
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