Renewing your lease? Don’t get trappedOct 12, 2018
I love the movie Goodfellas. I’m not even sure how many times I’ve seen it. There’s one line that scares me every time. Ray Liotta’s character is describing what it’s like when the mob needs to kill one of its own. “Your murderers come with smiles—they come as your friends,” he says.
If you’re a tenant leasing office space, and it’s time to renew your lease, your landlord will always come as your friend. Not to kill you, of course, but to keep you as a tenant and at terms your landlord finds favorable. I’m not suggesting that landlords are bad people. They come in all shapes and sizes, but one thing is universally true—they all want to maximize the return on their investment.
Their friendliness, genuine or not, can lull you into a false sense of security. That feeling might weaken your urgency to complete a lease renewal. You might feel that it’s safe to delay for a while.
When that happens, you’ve stepped into the trap.
Here’s a fundamental truth about negotiations—you must have leverage to be effective. If you think you’ll get a good deal because your landlord likes you, enjoy your time in the land of unicorns and candy canes. Landlords invest in real estate to make money, not friends. They are professional negotiators, which means they know a few things that you don’t, and they take advantage. You probably would too.
When you’re a tenant negotiating a lease renewal, you have exactly one piece of leverage—the possibility that you can move elsewhere. The sooner your existing lease expires, the more attractive a renewal becomes for you. Landlords know that. They want your timeline to be compressed. They want your back against the wall. It makes you more agreeable.
Many tenants mistakenly believe that a lease renewal isn’t really a negotiation, that it’s more a formality. They believe the real negotiating took place when they signed their original lease and that the renewal simply extends that. They’re wrong.
A lease renewal is a new lease. When you’re a tenant, you have no obligation to continue any of the terms in your original lease. You may choose to keep most of those terms when you renew, but that’s your choice. In other words, you will have agreed to them for a second time.
Office leases often take a year from inception to occupancy. You’ll need to establish your goals, create a budget, program your layout, identify locations, tour spaces, negotiate terms, conduct legal review, complete the buildout and install furniture. It can be done faster, but that requires compromises, which makes it more likely that you’ll want to renew in your current location, which gives the landlord a negotiating edge.
If you can’t renew and don’t have adequate time to move, you might be forced into something called a “holding over” period. Most leases require a massive rent increase during this time. Here’s something even scarier. If your inability to move causes your landlord to lose another tenant, you could be sued.
The claim would be that your refusal to vacate the space ruined a deal with the other tenant. Your landlord would cite damages as the rent he or she would have received from that tenant.
So what’s the solution? How do you avoid getting cornered into a bad lease renewal? It’s so simple it eludes most people. Start early—that is, start with enough time before your lease expires that you can move if your renewal negotiations fail.
If you want to strengthen your position, analyze competitive locations. Compare lease rates, neighborhoods, and amenities. To use a poker analogy, these locations are the cards you’re holding.
Estimate the lease rate your landlord would receive from a new tenant if you left, and the costs he or she would incur. Then you’ll know the cards your landlord is holding.
Follow this advice, and when your landlord comes with a smile, as Ray Liotta might put it, you can smile back.