Amongst the many things on your “to-do” list, negotiating your office lease renewal one year before it expires may not be one of them. This post highlights the landmines of renewing your lease without a well-crafted strategy in place. Below are our top 3 tips for renewing the lease on your office space.
Renewal Tip #1: Fees and Services
Any time you use the service of a broker, have an upfront discussion on fees. In a typical lease, the landlord pays the fees for your broker. In renewals, it is not always the case so make sure you know before you go ahead.
Renewal Tip #2: Test the Market
If you negotiate outside your “renewal window”, you can test where the owner may be at without obliging yourself to renew but before you have this conversation, you have to figure out what the market value is.
Renewal Tip #3: Broker Selection
Picking a reputable broker that practices specifically in your real estate type and the area is critical to increasing your leverage in negotiating your renewal. Most owners will know can spot a ‘fish out of water’ real estate agent right away!
Below we answer some frequently asked questions around the process of an office lease renewal. Ultimately, it comes down to the relationships you have with each party. A good commercial real estate broker will be able to keep those relationships healthy by laying out a plan that helps give you an advantage while minimizing risk.
What are my rights?
The first step is understanding your existing lease rights with respect to a renewal. Have your broker review your existing lease and provide you with a dashboard on when you have to make decisions, what the process will be and, what opportunities may exist. When does your renewal notice period start and end? How do both parties establish “fair” rent? Can you negotiate other terms?
Being ahead of this window will increase your leverage and help you plan for the future. Many commercial office leases have a “renewal window” of 6 months to 12 months before your lease expires where you have the right to renew in your space. Leaving this to the last minute will kill your leverage,
As soon as you communicate to the owner that you’d like to renew, you’ve triggered your option. Getting well ahead of the decision is the only way to alter or improve your position for the future by negotiating ahead of your “renewal window”.
What if I missed my window?
As long as you are still in the renewal window (usually, between the 6 and 12 months before your lease expires) you can renew but your leverage is greatly reduced. If your window has lapsed you could be in serious jeopardy depending on market conditions. The closer to your expiry, the less leverage you have, so address this immediately with your broker.
How do I know if I should renew or search for new space?
You’ve figured out your lease rights and have mapped out a timeline, the next step is to make sure that the space still works for you.
If you’ve been in the building for five years or more, the space could need updating. Perhaps there are some building issues that have been bugging your staff or making it difficult to work at different points during the day. For companies trying to manage real estate costs, we are seeing a re-design of space to increase density as a potential strategy in renewal. The average space per desk is dropping from 200 sq.ft./person to 170 sq.ft./person on average and in some cases even lower!
At any rate, if there is work to in the building or space or, if there are issues with management, now is your chance to make your voice heard. Who pays for what? How do you ensure promises are kept? This can all be negotiated if you have given enough time to do so by getting ahead of your “renewal window”!
How do I find a fair market value?
Most leases have a clause that describes how both parties will agree on fair rent for the renewal term. Unfortunately, it is rarely the case that both parties see the market the same way.
There is admittedly a lack of great resources to find the true rental rates for office space. While there is innovation in this field to make it easier for businesses to find this themselves, part of the problem is the complexity of the transaction. How much money is a landlord giving a tenant to induce them to their property? How long is the lease? How strong is the tenant’s financial strength? What kind of vacancy does the Landlord have? All of these details can impact the actual rent.
As such, it is typically easier for businesses to use a broker to give them fair market value for their space. A good broker will have a database of recent transactions (with all the data) and know what is for lease. In many cases, they’ll suggest taking you out to see a few comparable options. This not only creates leverage with your existing owner but oftentimes leads to finding a space that may better suit your needs!
I’m ready to renew. What’s next?
After you’ve taken the above steps, you can incorporate the fair market rent into any financial or management asks and present your case to the landlord. Negotiations can take longer than expected so a work-back plan with your broker is a good idea to ensure that you are both on the same page and that there are some controls in place to avoid the negotiations drifting too far into your window.
While the process has complications and steps, we are always here to help and you can contact us via [email protected]ward.com or the link below, for a quick assessment of your circumstance – without any commitment or cost.