Commercial space leases are usually made for fixed terms with an option to extend. If market circumstances change significantly over years, leases tend to be renegotiated. It is advisable to prepare for renegotiations equally well as for execution of the first contract. Katarzyna Bojanowicz, Business Development Director, Industrial & Warehouse Department, Cresa Poland, speaks about a lease renegotiation process.
When is a good time to start thinking about renegotiations?
Leases on the industrial and warehouse market are made for at least three years, but largely for five or more years. If we prefer to remain in the current location, we should renew our lease and definitely not leave renegotiations until the last minute. It is best to begin the process at least one year before the lease is due to expire or even earlier if issues to be renegotiated are more complex or the property we currently occupy is to be extended, requiring an environmental permit or building permit. If a tenant begins renegotiations with a landlord well in advance, the tenant will have enough time to complete talks with the current landlord or find an alternative space, should the renegotiations fail to deliver the expected outcome. A tenant considering relocation will also enjoy the upper hand in negotiations.
How to prepare for renegotiations?
It is advisable to hire an advisor with strong experience in the commercial property market who will provide a number of arguments for renegotiating lease terms. Having an in-depth knowledge of the market and competition, the expert advisor is able to suggest arguments to be used in discussions with the landlord. Professional support is therefore what tenants should consider in the first place.
Renegotiations should begin with a review of the tenant’s situation and lease conditions, and identification of new space requirements. A detailed market analysis is another key aspect. Ensuring an alternative solution for a potential failure to conclude negotiations to the tenant’s advantage is not only a way of securing the tenant’s interest. It is the prospect of relocation that will force the landlord to take action to retain the tenant who then enjoys a greater bargaining power. Reviewing alternative locations, the tenant should also be aware of their potential advantages and disadvantages.
Both parties to a lease clearly understand that following its termination the tenant will have to perform a number of duties, including space restoration to its prior condition, will bear relocation costs and risk a loss of employees or even operational disruptions.
Tools required before proceeding to renegotiations include:
- an experienced advisor,
- an in-depth review of the tenant’s needs and lease,
- precisely specified tenant requirements,
- an overview of the market and alternative locations, and
- estimated potential relocation costs.
A desire to improve lease conditions vs. a wish to maintain the current status
A lease made years ago may continue to be favourable or become unfavourable to its parties, depending on the existing market conditions. A landlord who has a waiting list of potential tenants will want to raise rents while tenants will be keen to keep them unchanged.
In most cases, however, it is the other way round. A building where the tenant is based is not getting any younger or more modern. Meanwhile, identical or similar buildings are being constructed, tempting tenants with a higher standard, space optimisation or better efficiency in space use.
Therefore, it is advisable to focus on negotiating better lease terms rather than on renewing a lease on its current terms and conditions.
No hurry, no protracting
It is important to allow enough time for negotiations to conduct them prudently and to avoid acting under time pressure. Negotiations usually begin 12-18 months prior to the expiry of a lease. And right at the start it is worth having a well-prepared offer to submit to the landlord. Such an offer should take account of the tenant’s needs and other key factors such as expected rent, refurbishments, time limits for financial settlements, insurance, additional landlord services and space contraction or expansion options.
Renegotiations are likely to touch on many lease issues but should never be protracted as time may start working to the landlord’s advantage.
Renegotiations during the lease term
It is quite rarely necessary to renegotiate a lease for reasons other than the forthcoming lease expiry. Renegotiations are usually necessitated by a sudden change making the existing lease conditions less favourable to the tenant. This may include a larger space requirement, amendments to laws regulating the tenant’s operations or redevelopment of the building or surrounding areas.
Most changes taking place are, however, unfavourable to tenants. If the landlord can be held accountable for such changes, they could be used as a strong argument for bringing down lease costs. This will not, however, apply to circumstances beyond the landlord’s power.
Despite this, it is advisable to sit down at a negotiating table and try to obtain even small concessions from the landlord. A lot more can be achieved by engaging an experienced advisor who knows the commercial property market well.
Renegotiations generally run more smoothly than negotiations of the first lease. The tenant and the landlord have known each other for several years and probably hope to continue their relationship if they decide to sit down to talks. Tenants can improve their bargaining power if they start renegotiations early enough, examine competitive offers of space available for lease, get to know the landlord’s priorities and call on the support of a skilled advisor.
More on industrial and warehouse market trends at: cresa.com
Cresa, based in Washington DC, is the world’s largest tenant-only commercial real estate firm. In representing tenants exclusively Cresa provides unbiased, conflict-free advice. Its integrated services cover every aspect of a real estate assignment, including strategic planning, employee demographics, workplace strategy, site selection, incentives negotiation, market research, transaction management, project financing, project management, portfolio management, and relocation services. Cresa offers clients customized solutions worldwide through more than 60 global offices. For more information, visit: www.cresa.com/poland.
