Negotiating A Commercial Property Lease In A Rising Market

by : Tim Maunsell

The 90's was a golden decade for tenants & tenant representatives. Establishing leverage over your landlord was easy because office vacancies were steadily increasing and landlords were under the impression that if they didn't do a deal today, the market would continue to erode. As a result, landlords were extremely aggressive offering large incentive packages that provided money for fitouts, & huge rent free periods. In short, getting a landlord to negotiate an existing lease was not a difficult job.

However, over the last few years the market has begun to change with steadily decreasing vacancies. Negotiations and how a tenant should approach their landlord have been forced to change also. There are two main reasons for change:

1) Because of smaller lease incentives, lease assumptions have decreased dramatically. Tenants trying to renegotiate a lease with several years left on the existing obligations lost the leverage that existed in the 90's when they could threaten to leave for another building if the landlord didn't restructure his lease.

2) Effective rental rates (the profit a landlord makes after netting out all costs of his concession package) are increasing. Many landlords would rather wait in what they anticipate to be a more favorable market for ownership than to restructure an existing lease today.

Although the above items have changed the face of negotiations, it is still a tenants market and there is no reason for tenants to simply accept market rates and above. As the market has changed, negotiating tactics must change also.

Here is some advice when you want to renegotiate your existing lease:

1. Know your landlord. As a tenant it is imperative that you know the goals and objectives of your landlords. Is the owner a passive holder of the premises & therefore less likely to give large incentives?

2. Be flexible. Sometimes landlords are not opposed to renegotiating a deal, they simply don't like the structure and shape of the deal at hand. So be flexible so the deal is attractive to both parties.

3. Geographically expand your horizons. Some sub markets might be tight (i.e. Sydney A grade space) whereas the North Shore may have the capacity to deal with large space takers competitively. Smart tenants can effectively leverage various sub markets to suit their needs.

4. Seek creative solutions. Despite low incentives, one way to get a low cost alternative to your current premises, is to find space that is already fitted out, in addition try to find tenants who would be interested in your space early to avoid any make goods requirements.

5. Look to the future. Just because your lease is not up within the 12 months does not mean the owner wouldn't be prepared to cut a deal now. In addition, you could seek an expression of interest campaign to tender your future requirements.

A tenants negotiating tactics and strategy must change with the market. Deals can be done now, more than ever, a tenant must be creative and understand the motivations of the other side when at the negotiating table.