The Basics of a Commercial Lease Renewal
It can be a complicating process to properly negotiate a commercial lease renewal. Sometimes tenants have pre-set renewal clauses in their lease, however more often than not there is no existing right to renew present. Commercial landlords have no obligation to renew your lease. Hiring a quality tenant representation broker to help you with your commercial lease renewal is always a good idea.
To find out if you have the right to renew, check your existing commercial lease for terms like “Option to Expand” or “Right to Renew.” There will be a notice period stated if your renewal option is present. It is usually six months before your lease expires but this can vary. Also take note of whether the extension rate is fixed or fair market. Keep an eye out for the term “rent floor.” It means you can’t get a reduction in your rent on the extended term and that rent will go up regardless of market trends. Some landlords will agree to remove this wording from the original lease if it was negotiated previously.
Pitfalls of Right to Renew
If you exercise your right to renew per your existing master lease, there are two common major drawbacks. The first is that you may have to commit to a renewal before you find out what your actual future gross rent will be. Secondly, there is often no chance to get any tenant improvement concessions from the landlord to update worn or outdated finishes.
One of the best ways to avoid any pitfalls when renewing your commercial office space lease is to have your tenant rep broker prepare a request for lease proposal (RFP). Your broker will review your existing lease beforehand and will help you determine if there are multiple items you want to renegotiate. The RFP will act as the template for your future renewal terms. If you’ve been a good tenant in the past, odds are that your landlord will want to keep you in the building. Tenants lose leverage when they try to negotiate on their own. The landlord will be looking out for their best interest and they have a team of professionals working on their behalf. Shouldn’t you do the same?
Alternatives to Right to Renew
If you are certain that you do not want to relocate, there are many benefits to not exercising a pre-set right to renew. Working out a brand new deal can often be better as it creates the ability to negotiate much more.
It is rare for a commercial lease to have an automatic renewal clause. However when they do, the lease auto renews unless the tenant notifies the landlord otherwise. This can be an alternative to longer term deals but is often not ideal for the tenant.
There are a few situations where your landlord may not want to renew your lease. This may happen if you have a fixed renewal rate set that is below market. In this case, a new tenant would make your landlord more money. Sometimes there may be other tenants in the building who need to expand. Your landlord may prefer to offer them your space to accommodate the larger need. Occasionally a landlord may simply not like your business and wants to move the building into a new direction.
What Should YOU Do?
When it comes time to decide whether or not to renew an office lease, consider the next few steps:
Step 1: Review your existing lease.
Determine if you have any existing renewal rights. Look into rent trends in your area, potential credit risk, lost income, and any tenant improvements that may be involved at a new space. Thoroughly research the commercial real estate market.
Step 2: Work with a broker.
This will ensure that your landlord takes you seriously and will help you avoid costly mistakes. Not only will your tenant representative broker make sure that the landlord is not taking advantage of you, but they can show you potential relocation options. In most cases, having a broker represent you won’t cost any additional out of pocket fees. It is essentially a free service and will save you time and money. You won’t have to figure out how to draft the proposal documents and they will have all of the market knowledge readily accessible.
Step 3: Keep in mind your landlord’s goals.
Know how many spaces in the building are filled and vacant. Also look into any building debts. You broker can help you with this. Your landlord doesn’t want vacant space, but they want to be sure they have the highest paying tenants. Try to balance these factors during negotiations. Your landlord may be willing to pay a bit for building improvements to keep you there. On the other hand, if another tenant will pay your landlord more rent, you may find yourself looking for a new office space.
The most important thing to remember during the commercial lease renewal process is to start early! Make sure you have ample time to negotiate your lease renewal and consider market alternatives.
Please contact us if you’d like to learn more about renewing a commercial office lease or our services.