Considering the fact that the average commercial tenant only negotiates a couple of leases in the lifetime of their business, and often with the same landlord, it’s easy to understand how myths about leasing can persist. Occasionally, these myths are created and propagated by the landlord, but also by real estate professionals looking to serve their own interests. We have detailed a number of lease renewal myths in our book, Negotiating Commercial Leases & Renewals for Dummies, but will summarize the most common here.
All of your negotiations on a renewal term should be done well in advance of your current lease expiration.
Myth #1
You must exercise your renewal option to extend your lease.
You may mistakenly believe that the only way to renew your current lease agreement is through your renewal-option clause. Ninety-eight percent of the successful lease-renewal deals that The Lease Coach completes for tenants don’t involve exercising the renewal-option clause. If so, everything except the rental rate would have been off the table for negotiation. Your renewal option, if you have one, must be viewed as a safety net or back-up plan. All of your negotiations on a renewal term should be done well in advance of your current lease expiration. If your landlord is unwilling to negotiate with you or you are unable to achieve the terms you’re looking for, that’s when you consider exercising the renewal-option clause. By playing your lease-renewal cards in the right order, you may be able to negotiate for all kinds of inducements and changes that you were not aware of when you signed your first lease agreement.
Myth #2
Rental rates can only go up.
Of course the landlord wants a rent increase, but that doesn’t necessarily mean they are going to get it. In fact, many of the lease renewal deals that The Lease Coach negotiates result in a rent reduction and big savings for the tenant. One important factor to consider is the Consumer Price Index (CPI) or inflation. The inflation rate for various cities differs, and sometimes the economy is in a period of deflation or recession.
Myth #3
Landlords won’t provide inducements on renewals.
Typically, inducements, or leasing incentives, include free rent, tenant allowance, and landlord’s work to the premises. The Lease Coach routinely negotiates these common inducements for tenants on their initial lease agreements – those same business owners are often shocked to learn that these inducements are also potentially available on lease-renewal terms. Although it’s true that most landlords tend to take their existing tenants for granted, it can be argued that any incentives the landlord is prepared to pay to acquire a new tenant can also be offered and available to existing tenants on their renewals, because the existing tenant is the landlord’s proven, long-term customer. Sure, a landlord can take a risk on a new tenant, but why wouldn’t they provide incentives to keep their existing tenants who already have a rent-paying record? Of course, you have to know how to ask for incentives to get them as the landlord won’t simply offer them out of goodwill.
Myth #4
Next year will be better than last year.
We don’t know why, but business owners seem to think that this will be the case. This is a myth – just because you get a rent reduction on your lease-renewal term doesn’t mean that business will get better. In many cases, your problem isn’t that your rent is too high, but that your sales are too low for your location. Remember, if you don’t change your location, your product, your staff, your marketing, your pricing, or whatever your real problem is, there’s no reason to think that next year will improve. This type of false optimism often wastes many years in the life of a business owner.
For a copy of our CD, Leasing Do’s & Don’ts for Commercial Tenants, e-mail DaleWillerton@TheLeaseCoach.com.
