Negotiating a Rent Reduction for Franchise Tenants
Could you and your franchised business benefit from a reduced commercial rent payment? Of course! No matter what the amount of rent you pay your commercial landlord on a monthly basis, if you can decrease that amount that means more money will stay in your pocket and not the landlord’s pocket.
In our experience working with franchise tenants, here are a number of helpful tips from The Lease Coach on how to reduce your rent now:
Get organized: Getting organized and beginning the lease renewal process should start 12 - 15 months in advance for franchise tenants leasing retail or commercial space. In most cases, you should not need to exercise your Lease Renewal Option Clause provided there has been a dialogue with your landlord and it has been established that the landlord wants you to stay for another term. Since most franchise tenants don’t know who their landlord really is, research on-line to learn more about him/her.
Prepare for the Battle. When The Lease Coach begins to negotiate a lease renewal for a tenant, our first step is to review the lease document which was signed five or 10 years ago. You may have provided a personal guarantee, letter of credit, deposit, etc. and these terms can be renegotiated during the lease renewal process. If you simply exercise your lease renewal option clause, often the rental rate will go up and the tenant will forego the opportunity to negotiate on other important terms.
If a rent reduction on a lease renewal is justified either by a change in market rents for the area or a decline in sales revenues for the tenant you should be prepared to show Profit and Loss statements. We also like to show the landlord industry articles, trends, or other supporting information about your industry and how it is doing in the marketplace.
Talk to Other Tenants – Specifically, Tenants in your Building. Valuable information can be gathered by talking with your neighboring tenants. We will interview tenants to share information and to determine their future plans. If other tenants are not planning to renew their lease, thereby creating more vacant space in the property, you will have more leverage. If another tenant has renewed his/her lease, the rental rate he/she agreed to pay will likely factor into the rental rate the landlord expects you to pay.
Create Competition for your Tenancy. So many franchise tenants go straight to their landlord regarding their lease renewal. At The Lease Coach, we like to create competition for our tenant clients. Instead of handing over your lease renewal to your landlord on a silver platter, we find alternative locations and solicit lease proposals from other landlords as a means of making your existing landlord re-earn your tenancy.
Approach Your Landlord and Your Property Manager. Confirm your landlord contact and make sure you are negotiating with the right person. You may have entered into the lease agreement negotiating with a commercial real estate agent for the landlord’s in-house representative; however, most lease agreements are negotiated with a property manager who you may or may not have a good, bad or otherwise relationship with. Once again, you need to size up your opponent and position yourself for the lease renewal process.
Get the Landlord’s Lease Proposal. We don’t believe in negotiating on the first date but prefer to discuss the lease renewal with the property manager and invite. This puts us in a position to counter-offer and negotiate on behalf of the franchise tenant we are working for. Most of the negotiating process will take place verbally – but only after the lease renewal proposal or document has been provided by the landlord.
Submit the Counter Offer to Your Landlord. Multiple counteroffers from both parties are part of the lease renewal process. If you try to slam-dunk the lease renewal too quickly your attempts for a rent reduction will probably fail. We recently negotiated a lease renewal for a lawyer who was pleasantly surprised how effective this was. We deliberately slowed down the process and renegotiated every single term in the formal lease agreement that needed to be revisited.
Negotiate, Negotiate, Negotiate. Negotiate to win. Most franchise tenants are not negotiating to win at all … they are negotiating not to lose. Would you watch your favourite sports team simply playing to tie? The landlord and/or the landlord’s representatives are negotiating to win and you must do so as well. That might mean getting creative and thinking of different ways that this deal might work. You might want to start at $15.00/square foot and go up to $18.00/square foot over time.
Counter Offer. A good boxing match doesn’t go two rounds; it goes 12 – 15 rounds. Remember, this is not an event … this is a process. Some of the best deals we negotiated for franchise tenants took four to six months. Even if you don’t have that much time left on your lease, usually you can hold over without paying extensive penalties. It is important to compromise at times. When we counter offer, we will often throw in a few red herrings – things that we don’t really care about and can readily give away.
Ask for more than you expect to get. We remember getting one tenant 12 months of free rent on a five-year lease term. When the tenant asked us how we did this, we explained that we had asked for 18 months free rent. Conclude the lease renewal process by signing the Lease Renewal Document or, if it doesn’t work out, you still have time left to relocate. You don’t have to wait until the end of your lease term and if your landlord is stalling you, this generally means that he’s got a nasty surprise waiting for you.