Securing a good incentive when exercising your option
Did you know that (generally) you have to enter into a binding agreement to exercise your lease option before knowing what the new rent will be?
Here’s the process:
- The tenant issues an irrevocable notice to notify the landlord that they plan to exercise their option
- The landlord has six months or more to gather information on deals in the market which support a rental increase
- The landlord issues you a proposed rent notice, for which you will have 14 days to respond.
If you agree to the proposed figure, it is taken as the new rental amount. And, if you contest, then you and the landlord must negotiate until you reach an agreement.
If the parties cannot agree, most commercial leases allow a valuer to be appointed to determine the market rent independently. However, this is a timely and costly exercise that both parties want to avoid.
So how do you secure the best deal?
The market rent review process is relatively standardised, but rent negotiation is not so straightforward. The devil is in the detail, and there are some traps that landlords set to trip up tenants.
What’s more, landlords have had six months or more to put a proposal together, and they likely have the benefit of a large real estate agency providing them with market evidence.
With this in mind and little market knowledge, how will you counter their argument with 14 days’ notice and still secure a great incentive?
Stay aware of landlord negotiating tricks
If a landlord thinks that they have the upper hand at the negotiating table, they will propose an excessively high rent. That is because they know tenants do not have the same level of negotiating experience and market knowledge to bring the proposed figure down to a reasonable level.
Alternatively, in a tenant’s market, the landlord may propose what looks like a small increase. They do this in the hope that their tenant will not see the value in, or have the time, to dispute the new amount.
The solution? Engage a Tenant Representative from the outset, long before exercising your option. Tenant Reps know the market and landlords know this. So, their strategy will be very different.
Control your lease terms
Want to know a secret? The only thing that a landlord’s real estate agent cares about is getting the deal done. They do not care about market review clauses that come into play in 3-5 years.
Landlords tend to favour ‘face’ market rent reviews, while we (tenant reps) advise our clients to engage in ‘effective’ reviews.
If you define whether the Market Rent Review will be a ‘face’ or ‘effective’ review before you sign your lease, then you can control whether an incentive is payable at market rates when you lease your space. Depending on the market at the time you exercise your option, the difference could be 15%-50% of the total rent over the lease term!
How to negotiate tenant incentives
There is an old saying that “you don’t get what you deserve, you get what you negotiate”. This saying certainly applies when it comes to negotiating commercial leases and rental rates.
In a post-COVID world with rents plummeting and vacancy rates soaring, the only way a landlord can retain property value is to secure high-quality tenants on long leases. So, when it comes to Market Rent Reviews, it is crucial to understand the process, the fine print and your potential bargaining power.
Most importantly, tenants need to stay aware of landlord tricks and must dispute increases, even if the proposed increase seems relatively small.
Get in touch with Tenant CS
Getting a Tenant Representation Specialist on your side will protect your interests and can save your business a lot of money over the long term. We won’t even charge you if we don’t save you money!
Our team are skilled negotiators, understand the market and will handle your lease negotiations from start to finish. Get in touch with us today to find out how we can help you.
Want to learn more about commercial tenant incentives? Read our ultimate guide here.
Rethinking your lease post-COVID? Tune into our workshop around achieving commercial rent savings and higher incentives.