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LEASE AGREEMENT REFERENCE GUIDE 970: STRATEGIES FOR RENEGOTIATING IN SOFT MARKETS $24.95


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Product Overview

This LARG contains the following reference materials:

Soft Markets Trigger Lease Renegotiation by Tenants, Weighing the Real World Impact of Pro-Tenant Operating Cost Exclusions, and the Lease Clause Critique: The Pro-Tenant Renegotiation Lease Amendment.

Number of Single Spaced Pages: 12

 

Excerpt

STRATEGIES FOR RENEGOTIATING IN SOFT MARKETS

 

This LARG focuses upon the tenant renegotiation of leases in markets with high vacancy rates. The first section looks at the factors which fuel such renegotiation, and some of the common scenarios in which retrading takes place. The Lease Clause Critique looks at a pro-tenant lease amendment which reduces minimum rentals in addition to providing other goodies for the tenant--all secured by the tenant for staying put in its original premises.

Soft Markets Trigger Lease Renegotiation by Tenants

Ah, the vagaries of the Market. During periods when there is a lot of vacant space out there, retailers, office tenants and industrial users across America take the opportunity to renegotiate their rentals downward. And landlords and their property managers know it.

A commercial property manager who manages a real estate company's office buildings, a seven building office, showroom, warehouse complex, and two retail centers with over 800,000 square feet of space, had the following observation:

”Tenant representatives have become so commonplace in the industry that a happy tenant no longer assures you of their long-term loyalty. It wasn't too long ago when tenants, if they were happy and being catered to, would probably decline a relocation offer. Today, however, without new projects being build, the only way tenant brokers can make money is to move people around. So they go out and aggressively search the market, painting a rosy picture of other buildings in the area. In many cases, tenants who are looking closely at their bottom line find some of these offers too tempting.”

Why Wait?

Even worse for landlords, rather than wait for the expiration of their leases, some tenants are renegotiating their rentals in the middle of their lease terms. This occurs when the existing rentals in the tenant's lease are substantially above the current market for similar space. What could induce landlords to agree to such mid-term rental reductions? The landlords know the tenant will walk after the initial term of the lease if rentals are not adjusted to reflect the market. And in many cases, the landlords trade a rent reduction for a promise by the tenant to remain in the premises for some additional period beyond the original term.

Such renegotiations often conform to one of the following scenarios:

  • The tenant is in the final year or years of its original term. It has a series of existing renewal options, but the rent for the renewals is above the current market. The tenant offers to exercise the next option, but at stipulated (i.e., reduced) rentals which conform to the market. And the tenant insists that the rent reductions take place immediately (i.e., during the balance of the original lease term).
  • A tenant is in the final year or years of its lease, and is approached by a tenant representation broker with a proposal to lease space in a rival complex at cheaper rent than it now pays. The tenant meets with the rival landlord and negotiates a detailed written offer for the alternate space. The tenant then uses the offer to renegotiate its existing lease with its original landlord, and to remain in its premises at reduced rent.
  • A large office tenant is approached during the middle of its ten year office lease by a hungry competing landlord, who offers to takeover the obligations of the tenant's existing lease, move the tenant to its new building, match the tenant's rent under the existing lease for the first three years of the new lease, plus pay the tenant a lump sum cash payment when the new lease is signed.

Not Just Minimum Rent

Even if the tenant has difficulty negotiating reductions to minimum rent under its existing lease, it still can seek concessions in other areas. The cost of losing a good tenant is high for a landlord in a market with high vacancy rates. In addition to the marketing costs expended to attract a replacement tenant, the landlord will be obliged to pay:

  • legal fees associated with drafting and negotiation of the new lease;
  • cash for improvements to the premises for the new tenant; and
  • a brokerage commission for the broker that procured the replacement tenant.

 

Lease Clause Critique

The Pro-Tenant Renegotiation Lease Amendment

This Lease Clause Critique looks at several excerpts from an amendment to an office lease which renegotiates the rental under the tenant's lease. It was no doubt a product of weak market conditions (i.e., high vacancy rates and falling effective rental rates in the market), and was probably agreed to by the landlord after the tenant threatened to vacate the premises to take space elsewhere.

Such renegotiations are a bitter pill for the landlords involved. Overall market conditions are beyond their control, and in most cases, landlords have provided good service and quality space to their tenants. But if the tenant is serious about moving out, there is little choice for the landlord. To attract a new replacement tenant, the landlord would have to pay the brokerage commission, the leasehold improvement expenses, and the legal bill necessary to make the new deal. And in most cases, the landlord would only receive the same rental as the original tenant now seeks in the renegotiation.


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