Your lease is expiring soon. Although you’ve always paid on time, your landlord is increasing your monthly commercial rent.
It’s unfair. Why do you have to pay more to stay in the same place?
Luckily, there’s a little bit of wiggle room when it comes to commercial leases. Here’s what you need to know about negotiating your lease — plus we’ll share our commercial lease negotiation checklist, so you don’t miss anything.
Getting a Handle on Your Commercial Lease
When was the last time you thought about your commercial lease? After signing a lease, most tenants only revisit their contract in a few situations:
- Your space needs have changed (you need more or less space)
- You want to sublease your space
- Your building sold, and you’re concerned about an increase in operating expenses
- Your landlord increases their renewal rate
Before going into any commercial lease negotiations, it’s essential to understand the differences between commercial and residential leases.
Commercial leases have fewer legal protections. Consumer laws that protect tenant rights don’t apply to commercial leases — lawmakers assume that business people are more knowledgeable to handle it on their own.
Commercial leases also have variable terms. Where residential contracts typically follow a similar standard format, commercial tenants have unique needs — as a result, every commercial lease is different. These differences give you room for negotiation.
Commercial Lease Negotiation Tactic
Here are four things to review before committing to a more expensive lease renewal.
1. Check the square footage of your renewal against your original lease.
Landlords across the country are “growing” their buildings as a result of changes in measurement standards.
The spaces themselves aren’t growing. Landlords are increasing the amount of rentable square footage. With the new measurement standards, they can charge for square footage they weren’t previously able to.
Examples of new rentable square footage include shared spaces in a commercial building including:
- Vertical penetration (elevators, stairwells, etc.)
When the square footage of your space increases as a result of building remeasurements, your monthly base rate will increase. Your CAM and triple net costs also increase if they are charged on a per square foot basis.
2. Confirm your rent isn’t bumped twice in one year.
Landlords often include free rent as a concession to new tenants to offset the cost of moving. To compensate, many landlords extend your lease term in proportion to the amount of free rent given.
For example, if you receive three months of free rent, your landlord may have added three months of rent to the end of your lease term.
If your lease includes rental increases, you may face two rental increases in one year. Here’s a sample of how that would work:
Original Three-Year Lease
- Months 1-3: are free
- Months 4-12: paid
- Months 13-24: paid with a 3% increase
- Months 25-36: paid with an additional 3% increase
This is the end of the three-year lease — now, your landlord bills back the three months of free rent:
- Months 37-39: paid with an additional three percent increase
- Months 40-51: follow the added months and are paid with an additional three percent increase over the previous period.
Your renewal term may have another three percent increase for Month 40, which effectively is two, three percent increases in the same 12 month period.
3. Check your security deposit.
Security deposits are typically a percentage of your last month’s rent. Your lease renewal will likely be at a higher rate than your expiring lease. Landlords ask for the difference between your current deposit and what your new deposit should be.
Some landlords will keep your deposit on file. This way, you reduce your out-of-pocket expenses, and better control your cash.
If your landlord doesn’t want to keep your deposit on file, suggest they “burn off” the security deposit and use it towards rent. This frees up your money to be used constructively as opposed to sitting in your landlord’s bank account.
4. Know Your Market.
Vacancy and availability are in a constant state of change. Your lease renewal may indicate market changes. Your landlord may also be testing your comfort level with a rate increase if they’re plannign to sell or renovate your building.
It’s also unlikely that the first lease proposal you receive is your landlord’s best offer.
As a business owner, you know that it’s more cost efficient to keep a customer (in this case a tenant) than it is to acquire a new one. That alone should give you leverage to negotiate your commercial least at rates that are favorable to you.
Understand Your Commercial Lease Better With WindWater
You don’t have to go at this alone. At WindWater, our tenant services team is well-versed in lease renewal negotiations. We offer no obligation, lease abstract services that provide a simple, easy to read lease abstract you can reference at any time during your lease term.
Curious? Contact us today for more information.