As the lease expiration date approaches the eighteen-month mark, tenants should be thinking about their future plans to make the most of your lease renewal negotiations. It is important to allow enough time to evaluate the market so that you can make the decision that is best for your business. 

Always have time on your side

Position yourself to avoid making a hasty decision that could have adverse consequences for your business. First and foremost, make sure you are aware when the deadline is for providing your landlord with written notification of your intention to exercise your lease renewal option. If you miss the deadline, your right to a renewal may be forfeited.

Unless the lease renewal rate is specified within the lease document, then the lease rate for the renewal period is a point of negotiation between the tenant and the landlord.

Current market conditions

Your real estate broker can provide you with a survey of current market conditions as they relate to the type of space you are currently occupying. Your broker can also provide you with trends within the region and an assessment of your negotiating leverage with your landlord.

The obvious advantages for the landlord to renew your lease are: preservation of the income stream for the property and saving the cost of advertising the space and renovating it for a replacement tenant.

Average cost of a relocation

The average cost of a relocation move for a tenant ranges between 6 to 9 months of rental payments. Landlords try to use this cost item when they are negotiating a lease renewal with their tenants.

List of issues to considered when negotiating a lease renewal:

• Base Year: The base year lease rate should be updated for the renewal period so as to reflect current market conditions.
• Security Deposit: During the initial lease term, the tenant has had the opportunity to demonstrate a good track record with the landlord. It would be reasonable to ask for a reduction of the security deposit amount that the landlord is holding. The difference could be credited towards the first month’s rent in the renewal period.
• Improvements: A lease renewal is an opportune time to negotiate with the landlord for improvements that would either enhance the utility of the premises or improve the overall image of the rental space. If no improvements are required, then the tenant should ask for a discount in the quoted lease renewal rate to reflect the savings that the landlord would be making from not doing the improvements to the space.
• Expansion Rights: A tenant should try to amend their lease to include a clause that would cover their rights to expand within the building. It would be best to specify the lease rate for the expansion space and an extension of the expiration date if additional improvements are to be made to the expansion space. The extended expiration date will allow for more time to amortize the improvement costs and result in a lower overall increase in the rental rate for the expanded space.
• Legal Review: An attorney can review the lease agreement to identify any clauses and terms that may be onerous to the tenant or not in keeping with current market conditions. For example, Sublease and/or assignment of the lease could have significant impact upon the tenant’s future financial obligations.
• Renewal Options: Due to ever changing economic conditions, tenants need flexibility with their leasehold obligation moving into the future. It’s to everyone’s advantage to specify the terms and conditions of the next lease renewal period.

The expiration of an existing lease can represent both challenges and opportunities for both landlord and tenant. Planning ahead can reduce the financial risks of the renewal negotiation process for the best possible outcome to your business.