Approximately two million commercial lease renewal transactions take place every year in North America. Whether you’re leasing commercial space in a strip mall, shopping mall, or elsewhere for your restaurant, you eventually will have to face a lease renewal negotiation with your landlord. Starting with the end goal in mind and planning far enough in advance will make this process much easier.
Most landlords push for a rent increase on a tenant’s lease renewal. This is normal and something you should anticipate. Much can transpire in a 5- or 10-year lease term between when you moved in and when you need to negotiate your lease renewal. Negotiating a lease renewal is not an overnight process… this can take some time and involves a number of steps on your part. We have detailed these in our book, Negotiating Commercial Leases & Renewals FOR DUMMIES, and have summarized these steps below:
Create competition for your tenancy.
Negotiate on multiple locations simultaneously – especially with lease renewals, even if you don’t want to move. Create options and play one landlord against another. Share with each landlord that you are receiving other proposals. The Lease Coach makes the landlord earn your tenancy or re-earn your renewal.
Start the planning and site selection process well in-advance.
For existing restaurants and lease renewals, begin 12 – 15 months in-advance. This allows for ample time for negotiating, completing paperwork, searching for alternate sites (if necessary) and accounting for Murphy’s Law.
Keep your success quiet.
Landlords often try to raise the rent due to a restaurateur’s success. If doing well in a particular location, you likely will not want to move even if you can afford the rental increase. Some agents and landlords may try to take advantage of restaurant owners knowing how expensive it can be to move and set up a new dining establishment.
Talk to other tenants.
For lease renewals, talk with other tenants in the building who have recently renewed leases. Ask how these renegotiations went and what the landlord was willing to agree to in terms of rental rates and further tenant incentives.
Negotiate for lease renewal incentives.
For some reason, restaurant tenants neglect, or are simply fearful of negotiating for lease renewal incentives. If your lease is expiring, ask yourself what inducements (eg: free rent/tenant allowances) would the landlord give to a new tenant just coming into the property.
Don’t have false optimism.
When restaurant owners tell us their restaurant isn’t doing 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, sometimes, this is absolutely necessary.
Don’t accept an inappropriate lease length.
For new restaurants, an initial lease term of five, seven or even 10 years is typical. However, when renewing, do not automatically sign for that same or similar time frame without considering your own future. Will you sell your restaurant or retire? Don’t get locked into a long-term lease renewal unnecessarily.
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 achievable. If your current rental rate is artificially high because of your last tenant allowance, a rent reduction on your renewal term could also be in order. Again, talk with other tenants who have recently renewed or moved in to see how much they are paying.
Don’t allow the landlord to retain your deposit.
If you have paid the landlord a deposit, ask for this back upon your lease renewal date. You have proven yourself as a responsible tenant over your initial term. Why should your landlord keep this money? The Lease Coach frequently gets the restaurant tenant’s deposit back as part of the renewal negotiations.
Brokers… Friend or Foe?
Real estate agents and brokers typically work for the landlord who is paying their commission. It is not normally the agent`s role to get the tenant the best deal – it is their job to get the landlord the highest rent, the biggest deposit, etc. The higher the rent you pay, the more commission the agent earns. If you are researching multiple properties, try to deal directly with the listing agent for each property, rather than letting one agent show you around or show you another agent`s listing. Your tenancy is more desirable to the listing agent if he can avoid commission-splitting with other agents.
Don’t disregard your Operating Costs.
Having your lease and/or operating costs analyzed are effective ways to keep your landlord and property manager accountable. Frequently, restaurant tenants pay inflated Common Area Maintenance (CAM) because of padded or miscalculated operating costs. Often, it can be advantageous for groups of tenants sharing the same property to unify for an operating cost analysis.
Don’t exercise options.
Even though you have a renewal option, you may not want to exercise it – especially if the renewal term’s 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 the renewal from scratch.
For a copy of our free CD, Leasing Do’s & Don’ts for Commercial Tenants, please e-mail your request to JeffGrandfield@TheLeaseCoach.com.