Business and Operations
Lease Renewal Do’s & Don’ts
By Jeff Grandfield and Dale Willerton – The Lease Coach
When negotiating, consider what inducements the landlord would give a new tenant
By Jeff Grandfield and Dale Willerton – The Lease Coach
Should you automatically agree to the same terms and conditions when you renew your lease as you accepted when you first signed? No. When we co-wrote “Commercial Leases & Renewals for dummies,” we explained that properly negotiating your commercial lease renewal was an important consideration for all tenants.
With effective negotiation, you can sign for a more appropriate lease term, receive valuable tenant inducements (paid by the landlord) and decrease your monthly rent paid to the landlord. Here are a few tips:
Do create competition for your tenancy. Negotiate on more than one location simultaneously—especially with lease renewals. Even if you don’t want to move, create options so you can play one landlord against another. Share with each landlord that you are receiving proposals on other sites. To avoid hard feelings, you can explain that other landlords have been courting you. If you have written offers to lease this will strengthen your argument.
Do start the planning and site selection process well in advance. Starting a minimum of 12 months ahead allows for ample time for completing paperwork, searching for alternate sites (if necessary) and accounting for Murphy’s Law. If you can’t secure a good deal within the first few months, you can still exercise your option to renew or start the relocation process.
Do keep your success quiet. Landlords raise rents for the lease renewal period due to your success. If you have been profiting in a particular location, you likely will not want to move with a rental increase. Some agents and landlords will take advantage of bakers knowing how costly it can be to move and set up a new business as a result of lost time, new investments and disruptions with customers.
Do talk to other tenants. For lease renewals, talk with other tenants in the building who have recently renewed leases. How did these renegotiations go? What did the landlord agree to in terms of rental rates and further tenant incentives?
Do negotiate for lease renewal incentives. For some reason tenants neglect, or are simply fearful of, negotiating for lease renewal incentives. Ask yourself what inducements (e.g. free rent and/or tenant allowances) would the landlord give to a new tenant just coming into the property. If these were there for the offering to a new tenant, then why wouldn’t an established tenant—with a proven track record—get the same (or more) consideration?
Do walk away from a bad deal. In business, you must look at pessimistic projections. Years of frustration in a slow business can be avoided if only more bakers had walked away from poor locations and bad lease deals. Be careful, take your time and get some help.
Don’t have false optimism. When bakers tell us their business isn’t doing very well, but they want to renew their lease anyway, this is false optimism. Unless you change location or something else about the way you do business, you should not realistically expect your next five years to be better than your first five years. Moving can be difficult, frightening, time-intensive and expensive; however, this may become absolutely necessary.
Don’t accept an inappropriate lease length. A five- or 10-year lease is often the norm for most tenants. When renewing, do not automatically sign for that same time frame without considering your own personal and professional future. Are you planning to relocate, sell your bakery or retire? A long-term renewal may be suitable for you, but remember three-year or even one-year terms are an option in many cases.
Don’t settle for your same rental payment. Achieving a rent reduction on your lease renewal is a very real possibility. If your landlord is leasing space to new tenants at less than what you are currently paying, a rent reduction for you should be a given.
Don’t accept the first offer. Once your landlord has made the first offer or proposal regarding your lease renewal, the real negotiations begin. Don’t be too eager to accept that first offer, even if it seems reasonable. With patience and good communication, you can almost better any first offer, which may be a smokescreen anyway.
Don’t allow the landlord to retain your deposit. If you have paid the landlord a hefty deposit on the property, don’t forget to ask for this back upon your lease renewal date. You have, after all, proven yourself as a responsible tenant over your initial term. Why should your landlord keep this money?
Don’t disregard your operating costs. Having your lease and/or operating costs analyzed is a simple and effective way to keep your landlord and property manager honest. Frequently, bakery tenants pay more than they need to because of miscalculated operating costs.
Don’t jump to exercise options. Even though you have a renewal option, you may not want to exercise it—especially if the renewal term rental rate automatically increases or can’t decrease. If you are certain that your landlord wants you to stay and market rates (the “going rate” in your neighbourhood) have softened, you may want to negotiate from scratch. With 98 per cent of our clients, we do not exercise their lease options.
Dale Willerton and Jeff Grandfield—The Lease Coach—are commercial lease consultants who work exclusively for tenants. Dale and Jeff co-authored “Negotiating Commercial Leases & Renewals for dummies” (Wiley, 2013). Need help with a new lease or renewal? Call 1-800-738-9202, visit www.TheLeaseCoach.com or e-mail DaleWillerton@TheLeaseCoach.com. For a free CD, Leasing Do’s & Don’ts for Commercial Tenants, e-mail JeffGrandfield@TheLeaseCoach.com.