FACT: Replacing a tenant costs more to the leasing company or landlord than keeping the tenant.
When renewing a commercial lease, the most effective negotiating tool available is actually telling the landlord you’re moving. Don’t just threaten to move – go out into the market, find a suitable option and tell your landlord, with confidence, that you are moving.
To understand how this tactic works, consider how the major cell phone providers convince customers to renew their contracts.
You’ve been a customer of Bell for 5 years and you call to negotiate a new contract. The deal you’re offered is slightly less than what you were expecting. Displeased, you immediately demand to cancel your account. Bell now has two options: allow you to cancel or offer you a significantly better deal. Bell knows that Rogers will gladly offer you a competitive deal to sign you up and they’ve now lost you for 3 years, if not forever. Everyone who has been in this situation knows what happens: Bell offers you a significantly better deal.
A real life example of this occurred in 2003 when I was negotiating a lease renewal for Biovail Corporation. Now, as you can imagine, Biovail had some pretty specific needs for its space. The current space was an 80,000 sq.ft. facility with 20,000 sq.ft. of finished office space, 20,000 sq.ft. of chemistry labs, 30,000 sq.ft. of pilot plant and clean rooms, and 10,000 sq.ft. of warehouse. Definitely not your garden variety industrial space.
I called the landlord to negotiate a favourable deal for Biovail, insinuating that if a list of 10 demands were not met, Biovail would relocate.
The landlord burst out laughing.
I went out and did my homework. It wasn’t easy, but I found several suitable locations that Biovail could very well relocate to. Keep in mind, the client had no intention of moving, but in negotiations it’s not the facts that count, it’s what you can make the other side believe.
Needless to say, when presented with the realization that his prize tenant may actually relocate, the landlord was much more accommodating and I successfully negotiated a lease renewal that included 9 of the 10 initial demands.
Every landlord and every tenant is different, as is every lease renewal negotiation. However, in order to negotiate the best possible deal, keep these best practices in mind:
- Hire an agent. When an agent is involved in the process, the landlord knows you are receiving professional advice and are most likely being shown alternative spaces; landlords will undoubtedly up their offering in order to be competitive.
- Start early. The closer your negotiations begin to the lease renewal date, the less leverage you have.
- Understand the market. Be knowledgeable, show your landlord you mean business. Have your agent discuss current market conditions and rates with you; have a good understanding of what competing landlords are offering.
- Draft an offer. Have your agent prepare an Offer to Lease and forward it to the landlord.
- Know when to walk away. Based on how the landlord signs back the offer you’ll know whether a renewal deal is possible or it’s best to say ‘Thanks, but no thanks,” and move on.