Don’t be tardy in the lease renewal process
Give yourself time to explore options in the market
A business owner friend of mine called the other day to talk about renewing his lease. When I asked my friend how much time he had left on his lease, he told me it was coming up for renewal in about 30 days!
This brings up the very first item you need to be aware of. Know when your lease term expires, and, perhaps more importantly, be sure you understand the renewal process called for in the lease.
I mention that because there are endless variations. The most common provision is that the tenant has the option of renewing the lease by giving notice to the landlord a fixed number of days before the expiration, with an additional provision reciting exactly what the rent will be for the renewal term.
So the two key provisions are the renewal mechanism and how the renewal rent is calculated.
I am aware of situations where the tenant did not meet the notice requirement for renewal and lost the lease. So pay attention to the notice requirement, and follow it carefully.
Some leases call for automatic renewal unless the tenant notifies the landlord that he or she wants out, again within a specific number of days prior to the expiration date. I’ve seen this one backfire on tenants as well, obligating them to stay on as a tenant, and pay rent, when they thought they could leave.
Determining the rent for the renewal period is tricky. I have seen leases where the amount is specified and others where the parties agree to “fair market” rent at the time of the renewal. What if they cannot agree on fair market rent? And if they can’t agree, whose judgment will be substituted?
Obviously, it’s important to address these issues in the initial lease, so problems are avoided at renewal time. And hopefully it’s also obvious that it’s important for tenants to review their leases from time to time, well in advance of expiration, so they fully understand the renewal provisions.
The most important consideration for a tenant is to explore options in the market. Tenants are generally only in the market every three to five years and are generally not familiar with all of the properties, landlords, market rents and concessions that can be had.
It’s also important that tenants let their landlords know that they are exploring those options. Landlords have plenty of incentives to keep current tenants. Otherwise, they might face significant expenses, such as brokerage commissions and build-out costs.
I should add a note here about tenants using a broker to represent them. Most “tenant reps” can add significant value because of their market knowledge, and can generally serve as a tenant’s outsourced corporate real estate department.
Tenant reps can assist tenants in exploring options in the market, and then comparing relative costs so that the tenant can make an informed business decision on how to proceed.
The renewal process might also provide an opportunity for the tenant to ask for modifications to the lease agreement. It’s impossible to cover every conceivable item in a lease document, and some will certainly crop up during the initial term. The tenant may be able to get them addressed at renewal time.
Similarly, the tenant may be able to get the landlord to make improvements to either the leased space or the common areas of the building, or both, based on the tenant’s experience during the initial lease term.
My strongest advice to tenants is to plan early. It doesn’t matter where you are in the lease cycle. Pull that document out, read it and get some advice on your options.
Dan Scanlon, a senior associate with Colliers International in Manchester, focuses on business tenant representation and investment sales. He can be reached at 603-206-9605 or firstname.lastname@example.org.