Renegotiating
TIPS ON RENEGOTIATING YOUR LEASE
With rents beginning to go up and the supply of office and industrial space shrinking, now may be the time to relocate or renegotiate. Real estate professionals are suggesting early renewals or relocations as solutions for firms with expensive real estate leases or excess space. The lease should be analyzed and renegotiated based on both short-term and long-term needs (For our clients who are lessors instead of lessees, now is the time to refinance. In addition, no one who reads this is a tenant of yours).
When should you begin your renegotiations or search for new space? The process should begin two years before the expiration of the lease. However, if you want to extend your lease for a significant amount of time or take over a significant amount of space it may be beneficial to start even earlier. Remember it costs nothing to negotiate to see if any opportunity exists.
What can you expect when renegotiating? No landlord is going to reduce your rent without getting something in return. Normally you will need to either extend the term of the lease and/or take additional space as an incentive. The lease rate that you will end up with is going to be somewhere between the current rental rate for a new lease and what you are currently paying. There are various factors the landlord will take into consideration when negotiating the rate. These would include the current and projected vacancy rates, does anyone have a right of first refusal on your space, will someone expand into your space and more.
When relocating the landlord generally will insist on being fully compensated for the entire lease obligation. The new landlord may be willing to assume the old lease, but be careful because if he defaults on it you may still be liable. In addition, the new landlord will build that cost into his rental rate. Subleasing is one alternative, but be aware that the excess space on the market will impact your ability to lease the space and also sublease space rents at a discount from direct leasing.
If you are in a building that has gone through a judicial foreclosure you may be able to treat your lease as void. This allows you to either renegotiate a new lease, or to relocate without penalty. We have heard of some very creative deals being done on space owned by the bank due to foreclosures. Please see your attorney if you think your building has gone through a judicial foreclosure and if this provision applies to you.
Don't assume that you are stuck with your high rent lease. Contact your landlord or a commercial broker who has experience in renegotiations.