Choyce Tips: April 2010: Common Lease Renewal Mistakes

(For access to full html version, please click here.) Office tenant behavior frequently seems contradictory. Ninety percent of companies with at least 10,000 square feet of office space will negotiate with the landlord through a third-party broker for relocations, but forty percent fail to do so for renewals, despite their landlord’s superior experience and market knowledge.  

As a service to those choosing the latter course, below are a few points to consider when negotiating directly.

1.      Treat renewal negotiations as a process. 

·        Evaluate Your Business

Where is your business going from here? Consider the best- and worst-case scenarios and what they mean to your space needs. Every aspect of a perfect lease comes with a cost, yet that cost can change depending on the building or your landlord’s specific circumstances at the time.

·        Evaluate Your Space

Seize this opportunity!  An evaluation of the pros and cons and a wish list for every potential modification can impact the morale, culture and efficiency of your office.  Explore the landlord’s willingness to make changes tenaciously.

·        Evaluate Your Lease

Audit your operating and tax escalations at least one year before your lease expires as well as your sublease clause and restoration requirements. At this time, you will have attained a broader perspective on building issues than when you first moved in, and these clauses can be modified during renewal negotiations.

·        Evaluate Your Alternatives

Can you win additional rights?  Evaluate a renewal option, a right to cancel, reduction in rent, “right-sizing” your space, new base years for calculating operating expenses / taxes, remodeling and free rent.  All of these are tied to the fair market value (FMV) of your space.  In today’s soft market, you are unlikely to determine FMV by just talking to your landlord.  You must evaluate your alternatives to understand what your current space is worth.

2.      Avoid asking for something only easy for your landlord.

At the outset, position your needs as reasonable with many alternative opportunities for fulfillment.  For example, forego asking for a one-year renewal.  Only the smallest tenant would relocate for such a short term, and other landlords would avoid competing for it, too.  Then, your landlord will know he can achieve a renewal with few concessions.

3.      Keep the option open to hire a broker, attorney or architect.

The most glaring signal you can send your landlord involves your decision to go it alone.  This tells the landlord, “We are signing up for the duration, and we are handling negotiations as ‘only’ a renewal.” 

A lease renewal represents a tenant’s largest single obligation – with major ramifications on a company’s business for many years down the road.  The process of assembling your team (architect, broker, lawyer, project manager) sends a strong message to your landlord about your decision to make a comprehensive evaluation of your real estate.