Top Strategies for Your Office Lease Renewal: How to Negotiate with Your Landlord
Negotiate with your landlord before signing an office lease renewal contract
It is always beneficial to stimulate competition by negotiating simultaneously with more than one landlord; in the case of an office lease renewal, it is imperative. Were you to negotiate solely with your present landlord, you could create a perception that you are a captive tenant; when you no longer have sufficient time remaining on your lease to preserve the option of relocating, this perception would become a reality – you would in fact become a captive tenant, and your negotiating leverage would diminish accordingly.
Why Your Landlord has an Advantage
Your landlord knows it is more expensive for you to move than to renew (moving and cabling costs, disruption to your business, etc.). Even with competition from other buildings, your landlord is likely to presume a competitive advantage. Landlords nearly always start a renewal negotiation with an over-market proposed rent, and then reduce the rate as slowly as necessary to renew the tenant at the highest possible rate.
Furthermore, lease renewal clauses often contain two points, which help landlords maintain higher rents:
- Options to renew usually must be exercised prior to the determination of rental rate – you might have to commit to the new term before knowing how much the obligation will cost, and without knowing how this cost compares with other buildings.
- Renewal clauses often contain a provision that prevents the renewal rent from declining below the rate paid prior to renewal. In many cases, rents are lower today than rents negotiated 5 years ago; this type of clause would prevent you from benefiting from today’s lower rents.
- The inherent advantages enjoyed by a landlord in a renewal negotiation are neutralized if you negotiate simultaneously with all prospective landlords, including your present one, in advance of the date by which you must exercise your option to renew. You should know the rental rates of all competing buildings before committing, and thus make an informed decision.
Negotiating simultaneously with all prospective landlords, including your present one, will generate one of two possible results. You will either:
- Obtain a competitive renewal that reflects currently favorable market conditions; or
- Uncover an alternative so compelling that you relocate
The additional costs of relocating can be added as a line item to the financial analysis of all buildings except your present location, to enable you to evaluate the economics of relocating versus renewing.
Renewing a Lease Can Provide Significant Cost-Savings for Landlords
Your landlord will realize significant cost savings if you renew in the following ways:
Tenant Improvements – While you may require some refurbishment, your tenant improvements are likely to cost a fraction of those a new tenant would require. Renewing a tenant can save a landlord thousands of dollars which would otherwise have to be spent to acquire and accommodate a new tenant.
Downtime – Downtime consists of two components; the time when the space is vacant, plus any initial free rent negotiated with the new tenant. If your departure causes six months of downtime, those six months of lost rent are equivalent to 10% of the value of a five-year lease.
Remember, it is much cheaper for your landlord to keep you than to lose you. You have leverage in a renewal, make sure you use it.
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