Debunking Lease Renewal Myths, for Franchise Tenants
As a prospective or new franchise tenant, you need to pay close attention to your initial commercial lease, but don’t just stop there! You should also think ahead to your commercial lease renewal!
Readers of our new book, Negotiating Commercial Leases & Renewals FOR DUMMIES, will learn (in part) that many lease renewal myths exist. Considering that the average franchise tenant only negotiates a couple of leases in their lifetime (and sometimes with the same landlord), it’s easy to understand how leasing myths can persist. Occasionally, these myths are created and propagated by the landlord, but also by real estate professionals looking to serve their own interests.
Here are a few myths to beware of:
Myth #1: You must exercise your renewal option to extend your lease. 98% of the successful lease-renewal deals that The Lease Coach completes for tenants don’t exercise the renewal-option clause. If they did, everything except the rental rate would have been off the table for negotiation. All of your negotiations on a renewal term should be done well in advance of your current lease expiring. If your landlord is unwilling to negotiate with you or you’re unable to achieve the terms you’re looking for, that’s when you consider your renewal option. If you play 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. We hear this all the time from tenants: “The landlord wants an increase on my lease-renewal term”. Of course the landlord wants an increase, but that doesn’t necessarily mean he is going to get it. Rental rates vary across the country and property to property. 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. It’s unfortunate that so many tenants who negotiate their own lease renewal and avoid a rent increase think they’ve won the battle, when a rent decrease was achievable if they knew how to negotiate.
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 negotiates these common inducements for tenants on their initial lease agreements; those same tenants are often shocked to learn inducements are also potentially available on lease-renewal terms. Most landlords tend to take their existing tenants for granted; however, it can be argued that any inducements or incentives the landlord is prepared to pay to acquire a new tenant can also be offered to existing tenants on their renewals – the existing tenant is the proven long-term customer of the landlord. 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 proven rent-paying track record? Of course, you have to know how to ask for incentives to get them; 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 franchisees seem to think that next year is always going to be better than last year. Just because you get a rent reduction on your lease-renewal term, business is not guaranteed to improve. In many cases, your problem isn’t that your rent is too high, but that your customer count is too low for your location.