Real estate attorney Gary O’Brien explains how commercial tenants can leverage the current economic environment to renegotiate their lease and save significant money in this article from JD Supra.
In my ten years of commercial real estate practice, I have never seen a better opportunity for tenants to reduce costs or secure better space. With few exceptions, today’s commercial leasing market is a tenant’s market. Tenants should not shy away from renegotiating their leases early to take advantage of the favorable market conditions.
It’s All About Leverage
I have been saying the same thing to my clients for many years, which is that lease negotiations are largely about leverage. In a landlord’s market, the only leverage a tenant has is to begin negotiations early and keep all options open, including moving to new space. For example, if a tenant has been leasing 20,000 square feet of office space for the past fifteen years it is unlikely that the tenant wants to move. Landlord’s know this. Therefore, the landlord will wait until as late as possible to approach the tenant about renewing its lease. Waiting serves the landlord’s interests, because at some point there is not enough time for a tenant to find new space, negotiate business terms, engage legal counsel to document the deal, complete improvements to the new space, pack up their existing space, retain a moving company, and move into the new space.
Depending upon the size, type, and complexity of the space, negotiations should begin anywhere from two years to a few months in advance of commencement. Many small commercial tenants believe that they can pack and move into a new space that does not require improvements quite quickly, however, they frequently forget that at least a few months must be allotted to finding the new space, negotiating the business terms, completing legal documentation, and moving.
Leverage shifts to the landlord in negotiations when the landlord knows the tenant does not have sufficient time to move before the expiration date of the tenant’s current lease. Unless there is a provision in the tenant’s current lease to the contrary, the tenant will likely become a holdover tenant on the first day after the expiration of the term. In the best case scenario, the landlord will have to provide a thirty day notice to quit which would not be effective until the last day of the calendar month following the thirty day notice. Accordingly, in the best case scenario, a tenant would have sixty days to vacate if landlord delivered such a notice on the first day after the expiration of the term. That may be helpful, but it is not something to rely upon for two reasons.
First, this is not the rule in all places. In some jurisdictions required notices will be effective 30 days after delivery even if that is not the end of a calendar month. Likewise, in some jurisdictions a tenant may be hauled into court in less than thirty days. Second, the tenant may be held liable for damages suffered by the landlord as a result of tenant’s failure to timely vacate the premises. Consequential damages of this type can add up quickly. Accordingly, tenant’s are advised to plan well in advance to avoid a situation where the landlord gains leverage because the tenant cannot vacate the premises in a timely fashion.
Conversely, early planning and action shift negotiating leverage to the tenant and save tenant money in the long run. For example, if tenant’s lease is set to expire on December 31, 2010 then tenant should begin (or already be in) the process of renewal or new lease negotiation now. The tenant should begin by sending out a request for proposal to its current landlord and to at least three other landlord’s with suitable space available. The proposals received will form the basis of tenant’s decision to move or stay and will help shift leverage to tenant in its negotiations. Tenant should make it known to its current landlord and others receiving the request for proposal that all options are being considered. To keep confidential the fact that tenant is exploring all options is to negate the leverage obtained by starting early and exploring options.
Get the full report at JD Surpa (you can download the pdf)