Every Tenant will have to deal with a lease renewal at one point or another. Unfortunately, many of them are unprepared when faced with the deadline. Not planning for a lease renewal is the same as sticking your head in the sand. You ignore the problem, but it doesn’t go away. I want to help you understand the process so you can plan accordingly. 

Anytime you are leasing an office, retail or industrial space, there is a start and end date for that lease. Knowing both dates are vitally important. Most Tenants know approximately when the start and end date are, but most don’t. Keep in mind, the lease renewal process is technically your responsibility. The landlord does not have to notify you when it is expiring because most of the time, they have a “Holdover Clause.” In some instances, this allows them to increase your lease rate by 150% to 200%. Once the lease expires, they may need to provide you a 30-day written notice to vacate, and you would have no other choice but to do so. In addition, by the landlord not informing you, they increase their leverage on the renewal because they believe you have nowhere to go.

Dictionary.com defines leverage as the power or ability to act or to influence people, events, decisions, etc. Leverage is what you give the landlord when you don’t plan accordingly. I have sat with many Tenants who have shared with me how the landlord had them over a barrel and unfortunately, there was nothing they could do about it. Due to that mistake, they ended up with lease rates that were way above the market. Some were so exorbitant that they were over 30% of the overall revenue the business was generating.

To a landlord, the commercial real estate property is a business. They have income, expenses, capital expenditures, marketing expenses…etc. The commercial property is in essence a small business. Some landlords are great to work with and are willing to invest in the tenant that is willing to commit to leasing space from them. However, on the other end of the spectrum, there are some that are difficult and don’t treat the tenant with the forethought that they never want them to leave. Please note, you want to make sure that you are the tenant that pays the rent on time and doesn’t cause issues or disruptions with other tenants.

There is a saying I learned a long time ago… There are two types of education in this world. The type you pay for and the type you are going to pay for. One way or another, you will end up paying for it; it’s simply a matter of when. The good news is that there are some great brokers across the country that specialize in Tenant Representation, and they have learned the skill set necessary to be a great lease renewal negotiator. 

In most leases, there is a renewal date notification deadline. This can be stated as no later or earlier than 6, 9 or 12 months prior to the expiration date. The landlord has their attorney write this into the lease so they can plan accordingly. If the Tenant is relocating due to downsizing, expanding or better yet, purchasing a new property, the landlord will have time to re-market the space in hopes of not letting it sit empty. 

Keep in mind, as far as the landlord is concerned, empty space is equivalent to a non-producing asset. This creates a loss of revenue that eats into their profit margin. They have to pay that amount out of their own pocket. 

Every professional landlord has a budget that is set when they buy the property. The amount that they charge in rent determines if they are at or above the budget. Unfortunately, we never know and, in all honesty, nor do we care what their budget is. All Tenant Rep. brokers care about is if the rate is at a price that fits their client’s rental expense budget. 

In almost every lease there are annual increases set that allow the rent to go up every year. Annual increases can be 2% on up to 4% depending on the market that you are in. Regardless, it is rare that a Tenant doesn’t get charged a higher rate year over year. Because of this, a lease rate can increase by 12% or more depending on the term or length of the lease. As an example, if the annual increases on a five-year lease are 3%, by the end of the lease the rate has increased by 12%. 

At the end of the term, the landlord will expect if not demand that the lease rate continue to increase from your last year on the renewal. You need to know if the market rates have continued to increase, or, decreased. Has your business increased in revenue so you can now afford the higher lease payment? Or worse, your revenues have decreased for whatever reason. The lease renewal will now become an important decision for you to plan on whether you can afford to stay. 

I can’t emphasize enough; you need to plan ahead of time so you can make the best decision for your business. By being prepared, you are now in the driver seat to leverage the market to your benefit. This allows you to level the playing field when negotiating against your landlord. Landlords, for the most part, are savvy businessmen and women. They negotiate leases professionally on a daily basis. They tend to believe that you can’t move your business with 30-days left on the lease. Time in this situation is not your friend. If you don’t plan ahead, and run out of time, unfortunately, you will either pay a higher lease rate, pay the holdover amount while you look for new space, or you have 30-days to vacate the space. 

You might think they would never do that to you. You have paid your rent on time faithfully for the entire term of the lease. You have a great rapport with them and the property manager. Some of you may have even played golf with them, or they bought you lunch or dinner at one time. Unfortunately, this is business for them and not a friendship and you need to see it the same way. That is why planning ahead can save you tens of thousands of dollars if not more. 

In my next article, Lease Renewal Part 2 I will discuss how to plan accordingly to make sure you are not paying for an education that you did not plan for.  If you need assistance with finding or renewing an office, retail, or industrial lease and want someone looking out for you, please contact me as my specialty is Tenant and Buyer Representation. The best part about my services is that they are free to you! If you would like to schedule a phone call to discuss further, please click below!