Five Key Lease Negotiation Points Every Tenant Should Know

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Baron E. McMillen, CCIM, MCR, JD

August 6, 2008

#1    Start early  
Time is the best leverage tenants can have in the process of renewing or relocating to an alternative location. Never be forced to “settle” or make bad decisions because time is running out. Regardless of the size of the requirement, initial contact to the landlord should begin no less than 12 months from the date of the project deadline or expiration date. Large projects (more than 10,000 rentable square feet) will require a schedule of 12 to 18 months. Starting early will allow one to survey the market, understand current market conditions and availability. What is considered market? What are the comps for the subject sub-market? Renew in place or relocate? Information and preparation are the keys to a successful negotiation.

#2    Retain professional representation
All brokers, tenant reps, attorneys and consultants are not the same; there are numerous specialties and styles. Interview several to find the best fit for the requirement. Building owners and landlords retain leasing agents and other top professionals to represent, protect and secure the best interest of the property and its investors. Users of space should do the same. Find an advocate to represent and secure your best interest. Traditionally, the tenant representative is compensated by the leasing agency or landlord. Each building is operating on a budget, and commissions are normally part of the operating budget. Tenants without representation are basically preserving the building’s operating budget to be used in the future to compensate representatives of tenants.

#3    Negotiate from a position of strength, but not through ultimatums 
Appear to be indifferent, but not arrogant. Always portray a willingness to cease negotiations and pursue other alternatives. Do not force an owner or landlord to back you into a corner. If the landlord calls the bluff and tenant capitulates, all negotiation strength and credibility is lost.  Remember it is a negotiation, not a battle of good and evil.

#4    Focus on what you would like, not only what you need 
If one does not ask, one will never receive. Be sure to prioritize the importance of each item. Negotiating less important items as vigorously as important items wastes time and could jeopardize the process. Conceding on the less important “throw away” items allows the other party to feel he has won some small victories in the negotiation. The victories defined by one party as small may be considered big wins by the other party.

During certain real estate cycles and market conditions, owners and landlords may surprise prospective and existing tenants with numerous incentives and concession packages. Besides possibly reducing the face rental rate, owners and landlords may be willing to abate rent for a certain period, provide reduced or free parking, or provide a larger amount of funds to improve the space, as well as other economic and non-economic items. Do not forget that good credit is key to obtaining the most aggressive terms and conditions.

#5    Don’t overlook the non-economic items while focusing on the economic items 
A lease document represents more than a rental rate, square footage and location of the premises. The legal and non-legal items of a lease can prove to be as costly during the term of the lease as the overall rental rate. Tenants should diligently review and negotiate all items including, but not limited to, operating expenses, expansion options, renewal options, cancellation options, transfer of tenant clauses, assignment and sublease clauses, subrogation and subordination clause. A professional representative can assist in interpreting each specific item and how it affects each specific application and requirement.

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