Office tenants face an inherent disadvantage in the renewal negotiation, and they usually lose money when renewing their office lease unless the tenant retains a qualified, experienced tenant representation broker. The asymmetry in a renewal negotiation arises from the fact that, unless there is a compelling reason to leave, tenants will renew 70% of the time due to the cost and disruption associated with relocation. Tenants can shift the odds back in their favor following the guidelines below.
1) Hire a tenant representation broker.
Professional landlords conduct negotiations on a daily basis, while tenants are only in the market once every 3 to 10 years. A qualified tenant representation broker will know the terms offered by the current landlord’s competitors. The simple presence of a broker will signal to the landlord that the tenant is considering relocation, prompting more competitive terms from the landlord. For more on the value of tenant representation, read my article, “Why Should I Retain a Broker to Negotiate My Office Lease?”
2) Introduce competition for your tenancy.
The tenant must do this regardless of market conditions and its ability or intention to relocate. If the current landlord does not believe that the tenant is considering relocation, than the tenant has no leverage in the renewal negotiation. The tenant and his broker must convince the current landlord that the landlord is competing for the tenant, even if that is not the case. Thus, you must plan to relocate EVEN IF your first choice is to renew your lease. For more on planning an office relocation, read my article, “How to Find the Right Office Location in 10 Steps.”
3) Start early.
Allow for enough time to evaluate the market, negotiate the transaction, and (threaten to) relocate if necessary. The tenant must have enough time to relocate so that the threat to relocate is a valid one. By starting early, the tenant has enough time to make a legitimate threat to relocate, has enough time to walk away from the first bad deal renewal terms, and still has enough time to be wooed back by his landlord. If the tenant starts late, he doesn’t have the leverage, flexibility, or time to get better deal terms.
4) Do not make the first proposal.
Insist that the landlord make the first proposal, revealing his position first.
5) Do not accept the first proposal.
Ask for more than you can get. Make your first counter at least an equal distance on the other side of the goal as the landlord’s first proposal. For example, if the tenant’s desired rent is $20/sf gross, and the landlord starts with an initial proposal of $21/sf gross, the tenant’s counter should be less than $19.00/sf gross (but not too low as to end the negotiation).
6) Keep emotions in check.
Do not allow emotions to drive the negotiation.
7) Do not place economic value or goodwill in your previous tenure in the building.
A tenant will not get a better deal because he has regularly paid rent for 15 years. Just the opposite! As a renewal, the tenant will get a less competitive offer than someone with no history in the building.
8) Only involve a few key personnel in the negotiation.
A successful negotiation depends on carefully controlling information. To get the best deal, your tenant representative may need to conceal some information and/or lie on your behalf. These efforts could be undermined if other parties are discussing the renewal/relocation.
9) Coordinate all communication with your tenant representation broker.
Do not speak directly to the leasing agent or the landlord without your tenant representative, unless you have consulted with your tenant representative beforehand and worked out a strategy. Otherwise, you risk undermining a coherent negotiating strategy.
10) Retain an attorney.
Retain a real estate attorney to review the lease and its amendments, but do not rely on your attorney to negotiate economic terms or on your broker to negotiate legal clauses. Make sure that your tenant representative and attorney are working in tandem.
If you know you want to stay in your current location for the foreseeable future, you may wish to take advantage of the current tenant’s market through a “Blend and Extend.” When negotiating any lease, do not forget the importance of the renewal option.
A well qualified and experienced tenant representation broker will guide you to a successful outcome. For more information, contact me at email@example.com or (630) 805-2463.