A commercial lease expiry is one of those things that can creep up on you and can be costly without the right preparation and advice. So if you have an upcoming commercial lease expiry, follow these four tips to get the best results.
1. Start early
This is the most valuable piece of advice we can give our clients. Timing is an essential part of any renegotiation or relocation project. This is because:
Without a lease option in place the landlord does not have to renew a lease - That means that you’ll have to find another space to move into - and fast! This is particularly difficult if a lot of your business goodwill (e.g. customers base, employees, fit-out, machinery) is attached to your current premises. Starting the process early means protecting this to some extent because it gives you time to communicate with your customers. You’ll also have more time to find a comparable space, in a suitable location.
When it comes to renewals, time is your friend - If your commercial leasing agreement does not contain an option, it means you have no automatic right to renew your lease. Assuming both parties are happy to renew, you’ll need to enter into negotiations again with the landlord to establish the details of the new lease. And, if the landlord knows you're running out of time, they’ll have the upper hand at the negotiating table. The silver lining? Post-COVID, landlords need the cash flow. So, if the timing's tight, we’re finding most landlords are more than happy to go month-to-month until the tenant settles into their new space. But we can't count on this happening forever and a holdover can be risky (see next point).
A holdover is an uncertain fate - If a fixed-term lease expires, the landlord may agree to let you stay in the premises on “holdover” or “over holding” on a month-by-month basis. But this option can be risky as the notice period is usually only one month (and in some cases, can be as little as seven days!). What’s more, the landlord is not required to provide a reason for termination - so you could be out very quickly if they secure a tenant!
Exercising an option requires notice - If there is an option to renew under your lease agreement it is usually accompanied by a notice period of between 6-to-12 months. The closer you get to your expiry date, the less likely you are to negotiate effectively or find alternative space. What's more, under most commercial leases, tenants are obliged to provide written notice of their intention to exercise their option.
Calculating the amount of time that you'll need to secure a great space and deal is not an exact science. It comes down to the size of your business, your internal objectives and projected future growth. We recommend starting within the following time frames:
At Tenant CS, we advise our clients to start preparing as early as possible. As a rule of thumb, when it comes to your commercial lease expiry, leave at least one year to explore the market and to decide whether it’s best to stay put or relocate.
We encourage larger occupiers to start the process at least two years before lease expiry. This is particularly true for mid-to-large-sized global companies where approval processes can be lengthy.
Is having time up your sleeve still valuable in a Covid market?
Pre–COVID, agents and landlords were always pressuring tenants to make quick decisions. But in the current market, where things are likely to get worse, tenants are in the driving seat.
There are plenty of great market options out there right now. So, if you don’t get the terms you are looking for, don’t be afraid to say no and walk away. If you’ve left yourself enough time, there’s sure to be another suitable option out there. In any case, in today’s market, Landlords will go to lengths to retain or secure commercial tenants, so they may come around to your terms.
Think carefully about whether it would be better to renegotiate your lease or to relocate to a new space in the long run. These days, unless you already have a tenant-friendly lease, we often advise our clients not to exercise their option, and instead, go to an open market.
In any case, to aid your decision, be sure to:
Explore the market - Is there a suitable space that you can move into? How would the new lease compare to your existing lease? Remember, no building is the same. Rent, vacancy rates and incentives will vary, depending on the building, location and the landlord. So, do your research.
Consider your business plans - How will these impact your current and future space requirements? Will your existing space be able to accommodate planned business changes or does it make more sense to move now?
Analyse the real cost of relocation - This is arguably the most important tip of all. Sure, the rental rate might be lower in another space, but think about the additional costs that come with relocation. For instance, IT/fit-out costs, ‘make good’ costs, moving costs and the potential impact the move might have on staff and customers. The grass isn't always greener on the other side. It's crucial to recognise that, sometimes, a higher rent is justifiable if the premises adequately serves your business’ current and future needs.
4. Appoint a tenant advisor
Don’t need the hassle, have the right knowledge or time to spare? Assign a commercial tenant advisor to do the legwork.
At Tenant CS, we represent commercial tenants and not landlords. And this means that the market information we rely on in negotiations focuses on what's important to tenants. For example, we analyse the rents, incentives and vacancy rates between different buildings and the quality of individual landlords.
Our years of day-to-day, hands-on experience in strategic negations with landlords and agents will not only speed up the process but will, without doubt, save you money. In our experience, tenants who negotiate their lease pay an average of 22% higher rent over the term of the lease. So, it pays to partner with a professional.