When it comes to running your business operations, you’ll have a lot on your plate. The last thing you want to worry about, as a business owner, is your commercial lease situation. Commercial lease renewal negotiations will vary from state to state, county, city, and location. Anything from the property value to your payment history can affect your renewal terms. In a previous blog, we covered some key terms to understand in your commercial lease. In this blog, we’ll focus on specific language as it relates to renewing your lease and some possible scenarios you may encounter during your renewal period.
Pay close attention to any “right to renew” language as that section will define the terms of your commercial lease renewal. This segment of the lease is an important factor when calculating your degree of security and flexibility for renewal terms and/or negotiations. Below are some common elements that may be covered in a “right to renew” clause on your lease.
Notice Requirements: The time to pay attention to your lease renewal is not when your lease is about to expire. A commercial lease will often have a period (usually 3 to 6 months) before a lease expires to iron out any renewal options. This period is usually accompanied by a written notice from the tenant to the landlord, which addresses renewal of the lease.
Terms of Renewal: Other terms to look out for include the duration of the renewal and language that explicitly states that a tenant has a right to renew the lease. This part of the lease may also state whether the rent will be kept at the existing rate, a predetermined rent increase, or subject to negotiation. Sometimes, this is fixed but that doesn’t mean it’s not up for negotiation if the surrounding market has changed or if repairs or upgrades are needed. Every situation is different.
Conditions and Qualifications: A landlord may apply conditions to a right to renew clause. This may include requiring a history of good standing and that the tenant has not defaulted or breached the lease in any way. Sometimes even one late payment can trigger these terms.
You can expect significant discussions during your commercial lease renewal. Breakdown in negotiations regularly involve issues where landlords and tenants have differing priorities and expectations. Here are some common scenarios and points of negotiation:
Rent Price and Rent Increases: This is the most common point of negotiation when it comes to renewing commercial leases. Landlords want to increase rent to current market rates or cover rising expenses, while the tenant seeks to keep overhead expenses stable. Before finalizing the lease, it’s important to have the agreement reviewed by a commercial lease attorney. They’ll be able to advise on what you can expect before agreeing or offering the “right to renew” terms. Some solutions for this scenario include, capping a percentage on the increase, using a fixed rent formula such as a Consumer Price Index adjustment, rent freeze, or phased increase during the renewal period.
Property Condition and Improvements: This often comes up when dealing with established locations within the community. The tenant wants to upgrade or improve the unit, while the landlord may want to limit expenses. When this happens, it’s important to agree on who bears the cost of the improvements, and if it’s open for negotiation during the renewal process. Maintenance responsibilities is another topic that comes up frequently and should be considered if the unit has some foreseeable issue that need to be addressed.
Exclusivity Guarantee & Restrictions: This scenario is a common talking point for new developments and builds. The tenant will want exclusivity rights for a certain business category within the confines of the location, while the landlord may want flexibility to secure other tenants. This is something you’ll want addressed before leasing a unit, but it may also come up during the renewal period. Some solutions for this scenario would be to include an exclusive use clause or terms for restrictions on competing tenants.
Subletting & Assignment Rights: Sometimes your business needs may change, or you can foresee a period of transition in the near future. This is something business owners need to keep in mind as they may need flexibility to assign or sublet, but the landlord may want control over who occupies the space. The talking points to identify will be the approval rights for assignment or subletting, along with the conditions and requirements for the replacement. If the terms are too strict, it can put the tenant in a tough position.
Negotiations around lease renewals often come down to rent price, improvements, exclusivity, and flexibility. Both parties should seek to protect their interests—tenants will want affordability with flexibility, while landlords will focus on market rates and control over their property. Consulting with an experienced business attorney near your area will be helpful in lease negotiations that involve compromise, clear documentation, and understanding for each other’s priorities.
