The option to renew the term of a lease is a common provision found in leases. Many tenants accept a level of rent during the renewal term equal to a set percentage increase or a factor of fair market value. Upon a renewal the tenant will remain in the space and rent will increase.
However, many tenants do not realize that there may be room to negotiate a lower rent than what was contained in the option. The option rent should be regarded as a “cap”, not an agreed upon rent.
Smart Business spoke with Craig M. Chernoff, a member at Semanoff Ormsby Greenberg & Torchia, LLC, about lowering the rent during a lease renewal, when to start the process and who you should involve in the process.
Why would a landlord agree to accept a lower rent during a renewal term than what the tenant’s option provided for?
When a lease is renewed, the financial benefit to the landlord can be substantial. If a tenant does not renew its lease, the landlord will be hurt. The property will sit vacant for a period of time, which may be significant. In order to induce a new tenant to lease the vacant space the landlord will incur substantial costs, including fit out costs and other allowances. Finally, the landlord will likely have to a pay commissions to a real estate broker for finding a new tenant. That may not be the case upon a renewal.
If, however, a tenant renews its lease, the landlord will immediately benefit. The property will not be vacant and the landlord will continue to receive rent. The landlord will not likely have to make concessions to the tenant, such as fit out costs and other allowances. Also, the landlord may not have to pay a commission.
That said, landlords know that tenants incur costs for moving, such as moving expenses, fit out costs and potential downtime. Accordingly, the landlord and the tenant each have a point at which either losing a tenant (as to the landlord) or moving (as to the tenant) does not make economic sense.
When you examine these different standpoints you can determine at what point a landlord will need to make concessions so as not to lose money by having a vacant space and incurring costs for a new tenant. You should ask yourself if you want to move, and perhaps pay significantly more once everything is said and done, or if you want to use the leverage you have to negotiate a cheaper rent and maybe even additional concessions.
How should a tenant go about performing this analysis and negotiating with the landlord?
A good understanding of market conditions is paramount. Real estate brokers best understand the relevant market conditions. There are tenant-oriented brokers and consultants who will help tenants perform this analysis. A tenant may have to pay a fee, but the savings may greatly outweigh any fees a tenant may incur. The tenant’s attorney should be intimately involved with this analysis so the attorney can effectively negotiate with the landlord.
Can this negotiation occur even if the lease already provides the terms for the renewal?
Absolutely. Just because a lease provides an option for renewal does not mean that a tenant cannot try to re-negotiate for better terms. An option does not commit the tenant, only the landlord. Remember, the tenant does not have to renew, and the landlord wants to try to keep the tenant in the space.
When should a tenant start this analysis?
Leases typically provide a time frame for renewals. These time frames vary, and may be 90 days, 180 days or even a year before a renewal. Ideally, a tenant should speak with an attorney and a real estate broker at least six months to a year prior to the date it must exercise its renewal option. The earlier the process is started the better.
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