Negotiating the Renewal Option
Most commercial leases typically run between 5- 10 years. In good leases, there are provisions to the rental agreement allowing a tenant to extend the length of the lease. A general rule of thumb: Instead of immediately exercising your renewal option, try to negotiate each renewal term instead. However, if you come to a standstill, you should have a safety net of something already negotiated ready for your protection. This is especially true if your location is critical or if your business is difficult to move. Here are my three quick tips to negotiating this most important feature in any commercial lease:
Always negotiate the renewal clause in the original lease
The new rental rate for a renewal period can sometimes work on a predetermined basis, as mentioned above. It is more likely however that a renewal clause will state that a fair market value be used to determine a new rate. While renewing automatically may sound easy, make sure to check spaces around your area in order to get a good idea of what other spaces are going for. Knowledge of the market and comps are both key when negotiating.
Stipulate the rate from the beginning
The fair market value itself should be carefully discussed and defined. Never let the landlord try to interpret what the FMV should be. Make sure that the FMV is defined as including items such as the tenant improvement allowances or concessions you might find from the landlord’ competition. When you are able to stipulate a specific rental rate for the renewal option, you protect yourself. If the market is higher than your renewal rate, you’ve already locked in the lower renewal option rate. If the market is lower than the renewal option rate, you are still able to try and negotiate the renewal rate down.
Know how to ask
Typically, concessions (or leasing incentives) include free rent and tenant improvement dollars. Business owners are sometimes shocked to learn that these concessions are also potentially available on lease-renewal terms.
Many times, landlords tend to take their existing tenants for granted. What many long-term tenants can negotiate is the cost to acquire a new tenant. Realtor fees, background checks, and potential lost monthly rent all add up – don’t be afraid to use your long-term, immaculate renting history with your landlord as leverage.
Of course, you have to know how to ask for incentives to get them; the landlord won’t graciously offer them out of goodwill.
Consider hiring a trusted broker in your area
Even if your company is somewhat familiar with the market and rental negotiations and believe you have someone with the time to properly manage the re-negotiation- you should still consider representation through a professional services firm that can help negotiate you the best deal.