The Best Way to Create Leverage in the Lease Negotiation Process
Lead Time: Why is it important and how much is needed?
To properly maximize a tenant’s leverage when looking for space or renewing, the process needs to begin eleven to eighteen months ahead of the lease expiration date. This will enable the tenant to properly vet the market and execute a relocation should the terms of renewing be unsatisfactory. If the current landlord knows their tenant can relocate, they will most likely propose more favorable terms.
Tenants often overlook how in-depth and complex the negotiation process is. To properly negotiate a lease, whether renewing, or relocating, the tenant must follow these basic protocols to ensure their best interests.
- Evaluate and tour the market:
Any tenant should know their options and what the market bears. Surveying and subsequently touring available options will give the tenant knowledge of how much space is available as well as a general idea of market rates.
2. Issue Requests for Proposals (“RFP”) and evaluate proposals once received:
By requesting a formal proposal, the potential landlord will not only be providing written documentation, but also gain a sense of seriousness from the tenant. Most landlords are also aware that if they are receiving an RFP, there is a good chance others are as well. The RFP and subsequent proposal should address all major points of a lease, as well as any unique interests of the tenant. Once all proposals are received, it is important to run both qualitative and quantitative analyses for comparison.
3. Complete space plans of tenant’s top two or three choices:
A landlord will value a tenant’s seriousness and commitment if they are at this stage. By having a space plan completed, the tenant will know which space they are best suited for. They can also determine exactly how much space they need.
4. Negotiate terms and prepare a Letter of Intent (“LOI”):
At this stage, the tenant should have an idea of their preferred property. It is appropriate for both parties to counter with their final and best offers. A LOI is a non-binding agreement that states both parties are prepared to move forward with a lease document.
5. Prepare and finalize lease:
The LOI will provide the framework for a lease. It is imperative that the tenant have an attorney review the lease. Once all terms are agreed upon, the lease can be executed.
6. Construct the space:
Depending on the size of the space and extensiveness of the improvements, this stage can take up to several months. Local zoning, permitting and approvals will also play a major role in dictating the process.
In short, retention of a commercial real estate broker is imperative. A broker will be able to expertly guide the tenant through the process of either renewing or relocating. Since the broker is constantly assessing the market, they will have a knowledgeable idea of available space, rental rates, landlords and lease terms. Developing a relationship with a broker before a tenant talks with their landlord will give them the upper hand from the start. From a tenant’s perspective, utilizing lead time in negotiating a lease renewal gives the tenant leverage, which creates savings.