Every commercial lease agreement has an end date or an optional renewal date built into it. As the landlord, you will need to propose renewal terms to your tenant at least six months and even up to a year in advance of the lease end date. This timing is important because if your tenants are going to leave, you’ll need to begin preparing to rent the space out again. Your tenants will need that time, too. Moving a business to a new location requires detailed logistics.
The way in which you propose, negotiate, and ultimately execute your commercial lease renewal will depend on your property, the current lease you have in place with your tenants, and the changes that each party may be looking for.
Here’s a general guide to what you need to think about when the renewal process begins.
When Should You Renew Your Lease Agreement?
There’s an optimal time to renew your lease agreement, but the tenant in your space may have a different idea about when they want to renew. Every commercial lease will have a pre-existing deadline and end date. That’s a reasonable time to renew; your lease agreement requires it and a commercial tenancy is such that going month-to-month would not be a great option for anyone.
The market conditions are always shifting, however, and you may want to negotiate a new lease ahead of the end date. Your tenants, too, may have a need to renew the lease at a time that’s outside of the already established renewal period.
You want to be in the best possible bargaining position, so don’t renew early unless there’s a strong advantage for you.
If there’s no good reason to renew your lease agreement early, wait until six to 12 months before the end date approaches before you begin negotiating. If a specific condition or situation shows up, however, you might want to open up the dialogue early with your tenants. Here are some of those situations that may inspire an early lease renewal:
- You want to sell your building. If you’re planning to sell the property that you currently own and it’s occupied by tenants, you will need to present a stable and profitable rent roll to your potential buyers. When tenants have a longer lease in place, your property will look more inviting for investors.
- Vacancies are on the rise. If you’re renting out space in a commercial building and you notice that a lot of tenants are opting to leave rather than renew, it’s understandable to feel a bit nervous. Be aggressive about retaining tenants by offering lease renewals early. A completely vacant property will not serve you, so as you’re filling the vacancies in a building, renew those lease agreements with current tenants.
- Rental values are changing and the market is shifting. If rents are a lot higher now than they were when you locked in your tenants, it’s natural to want to capitalize on those rising values. Your tenants will see right through this of course, so make sure you have something that you can offer them in exchange for an early lease renewal. They could stand to benefit as well; renewing now might mean higher rents, but renewing in two or three years could drive those rents even higher. Study the market. Present what you’ve found. See if they’re open to discussions.
Tenants are not obligated to negotiate their commercial lease renewals early. You have a lease in place already, and that’s usually going to drive when you start talking about renewals.
Negotiating Your Commercial Lease Renewal with Tenants
Typically, you’ll treat your commercial lease renewal like a new lease entirely. It’s not the same as residential leases, where everything mostly stays the same and all the terms and conditions roll over into another year. Instead, you’ll want the freedom to make some changes and your tenants will, too.
This will take some time. Start early so you aren’t rushing into decisions. Expect some back and forth with your tenants. This is not likely to be as easy as sending a draft renewal to your tenants and receiving an immediate signature.
Here are some of the things we recommend you consider as you negotiate your commercial lease renewal:
- Know the Market.
If you’re a commercial real estate investor, you probably know your market pretty well. It’s important that you look at key metrics before you negotiate a lease renewal. You’ll need to know if occupancy rates are higher or lower in the High Desert than they were when you put together the original lease. You also need to know your own property value and those of the spaces around you. There may have been new construction or a shift in demand. If commercial spaces have undergone serious renovations, you’ll have to evaluate whether your own property is keeping up.
The commercial real estate market is rarely stagnant, and you’ll want your new lease agreement to reflect the changes. If you’re not sure about how your property fits into the current market and competes with the other spaces, talk to a commercial property manager in the High Desert. We are monitoring the market constantly, and we can see the shifts and the trends coming. This will help you negotiate.
- Know Your Tenants.
It’s also important to study your tenants and their business. Are they doing well? Are they struggling? What are their current spatial needs, and have those changed since you first began leasing them their space?
If a company is renting office space from you and they’ve grown their in-office workforce by 10 or 15 employees, they may have outgrown where they currently are. Prepare to offer the sorts of options that will keep them with you. Or, maybe their in-office workforce has shrunk with remote work remaining a viable way to earn a living. In that case, you might need to offer them something else.
Once you have a sense of where you are in the market and where your tenants are with their business, you can begin to negotiate the terms that are most important to each party.
What is Negotiable in a Commercial Lease Agreement?
It should come as no surprise that you can negotiate just about anything in your lease that you like or you don’t like. Remember that tenants can do the same.
Some of the most common points of discussion will include:
- Rental rates. You know that the commercial real estate market rises and falls just like any other market and the value of your investment property is always fluctuating. Your tenants may come to you looking for a lower rental rate. In a market where rents are rising, however, you can likely propose an increase. Know what they’ll be paying if they decide to go elsewhere. A well-established business cannot move spaces easily, and when you offer a renewal rate that’s competitive and reasonable, but still profitable for you, you’re likely going to keep those tenants.
- Common areas. If you’re renting out space to several tenants, you’ll have shared spaces such as the lobby in a building, the parking lot, and outdoor space. There may be shared conference rooms and other facilities. Improving these common areas can be an incentive for existing tenants to renew their leases.
- Improvements and renovations. You might be asked for new carpet and fresh paint. There may be modifications requested. These could be large investments, so prepare for the costs that you’ll have to incur and consider them when you’re negotiating rental amounts going forward into the new lease agreement.
There will also be general terms and conditions to negotiate in the lease renewal. Every commercial lease is set up differently, especially when we’re talking about who pays for utilities, taxes, maintenance, etc. A lot of tenants are looking for additional flexibility, especially as the economy continues to grow and evolve. You may find yourself talking about early termination options, and expansion and contraction terms.
Meet with your tenants to get an idea of where they are and to share where you are. If you can have a respectful, friendly meeting ahead of negotiations, you’ll get an idea of where your starting point should be. You’ll also save yourself a lot of time if they share that they’re not planning to renew the lease agreement at all.
Remember that this is not a process that can be rushed if it’s going to be effective. Give yourself plenty of time to intentionally think about your lease terms and what you want. Find the middle ground with what your commercial tenants need.
This has been a general overview of the renewal process for commercial lease agreements. There can be a number of variables, based on how you run your own rental business, what your commercial space is used for, and who your tenants happen to be.
We’d be happy to provide a more detailed and nuanced plan for your specific needs. Please contact us at Preston-Lee Management Company. We’ve been providing property management services in the High Desert for more than 30 years.
