Counteroffering the Landlord's Lease Renewal Proposal
You have received your landlord’s lease-renewal proposal … what is your next step? Your job isn’t to simply accept those terms. The proposal is just the beginning.
Just like a good boxer, a franchisee will find numerous character traits very important when going back and forth with multiple counteroffers. These include mental stamina, strong will, and patience. Often, a landlord will win a negotiation with a tenant due to greater endurance.
One of the first things you need to remember is to put your signed counteroffers in writing, with an expiry date within which time the counteroffer is open for acceptance. Normally, you would have had a prior verbal conversation with the landlord or their representative about renewing your lease. It generally makes for a better deal-making process if you don’t blindside anybody in your counteroffer. That means discussing your concerns with them in advance so that at least when they see your counteroffer, they aren’t taken aback.
If you have a complaint about the broken-down fence along the property line, start by asking your landlord about it. If you are told that fence repairs are already scheduled for next month, then you will not have to ask them to complete it. Instead, confirm that this work will be completed and ask for that verification to be supplied to you in writing.
Making your pitch for a rent reduction prior to your lease renewal is not an unreasonable request. Depending on your rental rate, staff wages, and sales, you may be struggling more than you should be and need to evaluate what you can reasonably afford to pay your landlord. If your problem is low sales, now is the time to ask yourself, “Why is this happening?” There may be any number of valid answers beyond your control – there may be many vacant units around you, the anchor tenant may have moved out of the property, an industry competitor may have opened up shop nearby, the economy may have shifted, or another landlord has built a brand-new development close by that is drawing customer traffic away from your location.
Another recommendation is for you to do site selection (even if you don’t want to/plan to move), collect written Offers to Lease, and play one landlord against another. By doing so, your existing landlord may think that they may lose your tenancy to another property. Explain to your landlord that listing agents for other properties have been chasing you with leasing opportunities for a better reception. Landlords can’t blame you if they think another agent was simply prospecting your tenancy.
If you’re tempted to try and bluff your way through this, think twice! Landlords know what other spaces are for lease in their area and at what rental rates. Hold a written lease proposal from a competing landlord in your hand and even show it to your current landlord (at the appropriate time) to drive home the point. Franchise tenants can create competition for their tenancy even if the properties are far apart or not equal in class or rental rate. Whether you are lost to a nicer, older, or more expensive property, your existing landlord still inherits a vacancy.
If you started working on your lease renewal well in advance (the recommended route …), you will have the time you need to play the waiting game with a slow landlord. If your lease deal is not progressing as quickly as you would like, don’t hesitate to ask why. The landlord may be thinking about listing the property for sale and doesn’t want to renew your lease at a lower rate than you’re paying now for fear it will devalue his property (and it will). The landlord may be waiting to see if another key tenant is going to renew their lease or move out. Alternatively, the landlord may be thinking of demolishing the building to make way for a new high-rise condo. Generally, if a landlord is slow to respond or reluctant to engage in a lease-renewal process without a good reason, it means potential trouble for the tenant.
Now that you have the landlord’s lease renewal proposal in-hand, don’t just assume that everything will go smoothly. As The Lease Coach since 1993, we have found that franchise tenants often leave a lot on the table when negotiating a commercial office lease or renewal. Rarely do things ever go as planned and you always have to account for Murphy’s Law. Renewing your commercial lease takes just as much time, effort, negotiating expertise and careful consideration as your initial lease – if not more! The following are just five of the most common oversights we have witnessed of franchise tenants … please don’t make the same mistakes!
1) Renewing With No Deposit
If your lease agreement requires you to make a deposit for the initial lease term, then it is not acceptable for that deposit to continue indefinitely. Ask yourself, are you a security risk? Likely not! Have your rental payments been made on time? When we negotiate lease renewals for franchise tenants, we frequently succeed in getting the deposit reduced or returned to the tenant.
2) Allowing Sufficient Time
Lease renewal negotiations should begin between nine and twelve months before the term expires. This will give you sufficient time to look at other sites and do your homework. If you can’t get a decent renewal rate, would you rather find out you need to move with nine weeks or nine months left on your lease term? Time will be your ally or your enemy, depending on how you use it.
3) Determining Your Bargaining Strength
Several factors will determine your bargaining strength with respect to negotiating a lease renewal. These include the overall vacancy rate of the building and recent tenant turnover. Your size in relation to the entire property is relevant. It’s not whether you occupy 1,000 or 5,000 square feet, but more so what percentage of the building you represent that counts. Your business history is also important. Franchisees are typically long-term tenants and therefore are highly desired by commercial landlords. And don’t just automatically exercise your renewal option.
4) Missing Out on Lease Renewal Allowances and Free Rent
Franchise tenants often don’t ever think “tenant allowance” on their lease renewal term. Approximately 75 % of our clients get a tenant allowance and even free rent on their renewals. Remember, if the landlord is giving allowances to new tenants coming in, then why shouldn’t you get an allowance too? After all, your tenancy is proven, plus there is much less risk for the landlord putting cash into your renewal than taking a chance on a new tenant.
5) Keeping Success Quiet
One of the main reasons a franchise tenant will be forced into a rental rate increase for a renewal term is the landlord’s belief that the franchise tenant can afford to pay it. The more successful your business is, the quieter you must be about that success. It’s important to stifle your staff, as they are the ones who frequently tip off the property manager that you don’t want to move. While a commercial landlord won’t accept any blame for a poor economy, he/she will take credit (and rental increases) when times are good for the tenant.
Franchise tenants are often at a disadvantage when negotiating (or renegotiating) with a commercial landlord. Franchisees may have only negotiated or renegotiated one or a few commercial leases / lease renewals in their lifetime, while landlords (and leasing agents) negotiate lease deals every day for a living. If ever in doubt, hire a qualified Lease Consultant (who is working for you and being paid by the tenant) to advocate for you, represent your best interests and to get you the best lease deal possible. Remember, in commercial leasing, franchise tenants don’t get what they deserve … they get what they negotiate!
For a copy of our free CD, Leasing Do’s & Don’ts for Franchise Tenants, please e-mail your request to [email protected]..
Dale Willerton and Jeff Grandfield - The Lease Coach are Commercial Lease Consultants who work exclusively for tenants. Dale and Jeff are professional speakers and co-authors of Negotiating Commercial Leases & Renewals FOR DUMMIES (Wiley, 2013). Got a leasing question? Need help with your new lease or renewal? Call 1-800-738-9202, e-mail [email protected] or visit www.TheLeaseCoach.com.