How to renew your commercial lease agreement

Negotiating a lease can be a complicated process if you don't know what to look for. Do lease rates always have to go up? Can I get incentives on renewal? What happens if I continue without a lease?

First of all, leases are important. Landlords usually prefer long term tenants, but something I always tell my clients is that leases are for the tenant's protection as well.

To give an example of this, a friend of mine (we'll call him Wayne) owned an art gallery in a great location in a small-town for over 20 years. After the initial five year term, he didn't renew his lease and continue month to month for more than 15 years! Then the building owner decided he wanted to retire and sold his building to a new investor group. What happened to Wayne? The new group went out and found a new tenant. They didn't give Wayne a chance to renew, to match the new tenant's rent and sign a lease. No, they moved him out with no recourse. Without a lease, your landlord has to give you only nominal notice, and you have to move out.

Commercial tenants are not afforded the same protections as residential tenants, so it's essential to be aware of this.

So what do you need to know about your renewal?

The first thing to think about is the option to renew. Many leases have a clause giving the tenant the right to renew. If exercised, this forces parties to reach an agreement over rates, if not by mutual agreement then often through third-party arbitration that is binding on both parties. Some options must be exercised six months out, others nine months, some are a year. Every lease is different, so it's essential to know when you have to exercise the right.

It's also important to be aware of market conditions. If you exercise your renewal right, and market conditions have gone up, you can find yourself paying considerably higher rent because this is "fair market value." This can also be the case if you've signed an undervalued lease or sublease and you want to renew. In this case, it may be best to renegotiate with your landlord without the provisions of the renewal clause and be prepared to move locations if you can't reach an agreement.

One thing you should consider when renewing your lease, is future renewals on the site. If your current rental agreement gives you an option for one further renewal, you should consider negotiating an additional renewal term if you plan on staying long term.

It's critical to have someone in your corner when it comes to renewals. In the past, we've negotiated free rent, TI allowance, rental discounts, and other non-monetary terms to create more favorable outcomes for tenants. Rent doesn't always go up, and it's important to know your options before stepping into a negotiation.

Moving can be a considerable inconvenience for tenants, and it’s usually preferable to stay on-site if the location is still working. That said, there are times when you may have an uneasy relationship with your landlord, or there’s uncertainty in the future of the location (for reasons such as expropriation by government authorities). In these cases, you should seriously consider moving. It’s often better to move when you have options than to be forced to relocate for reasons out of your control.

The more prepared you are, the more likely you are to have a favorable outcome.