Lease Renewals

Now that your lease is due to expire, it’s time to make a decision about what to do next. Should you look for new office or industrial space? Or should you renew or expand the lease on your existing business space?

Since a real estate lease legally documents the start and end of the length of time a tenant is entitled the use of a specifically designated space in a building at a fixed monthly cost, the tenant automatically loses the right of use upon the date of expiration signified in the leasing agreement.

If the tenant is satisfied with the location and does not anticipate any difficulties in occupying the premises as is for the foreseeable future, than renewing the lease prior to expiration would be a favored option. The earlier, the better, since the last minute renewal of a lease places negotiating leverage firmly on the side of the landlord. Why is this so? The obvious reason is that the landlord knows by not agreeing to his lease renewal proposal the tenant will be forced to move, and incur costly moving expenses and downtime, and it would be more cost effective in the long run to accept the landlord’s proposal and stay. However, if the lease renewal is proposed to the landlord early in the lease’s term, the landlord is more likely to be reasonable during negotiations in order to keep a preferred tenant, and avoid having to carry empty space until finding a new occupant.

Another scenario would consider a lease renewal by a tenant who signed the original lease when office, industrial or medical office space was at a premium and rents were accordingly high Let us say business space is widely available, and the pressure of competing for tenants has resulted in a downward spiral of commercial rents. It is still early in your lease. Now is the time to propose a lease renewal which would reflect the current situation and lower your rental costs. At this point the tenant may have a negotiating advantage. If the lease renewal is for a sufficiently extended period, the landlord may consider keeping a model tenant over a longer period of time worth the risk of rents once again rising, and the possible loss of revenue. This situation would be offset by the tenant’s longer occupancy. However, once again, it cannot be stressed strongly enough, that if a lease renewal or renegotiation is proposed when the original lease is nearing expiration, the leverage is all on the landlord’s side.

Another reason for early lease renewal or renegotiation is one in which the tenant miscalculated space requirements and now finds that he has overbought square footage. In such a case the tenant would most likely propose to renegotiate the current lease to allow the subletting of unused space or propose the landlord rent the space as a separate entity and lower the current tenant’s square footage costs accordingly. The landlord may well offer a counterproposal which would require the renegotiated lease to extend over a greater length of time than the original lease in order for the landlord to allow either a sublease or agree to a space take back. If the current space is acceptable for the time period specified, then the tenant may consider it an advantage to have known fixed occupancy costs over an extended period of time.