Negotiating Your Leases

Published on Tuesday, 14 January 2014 09:27:07    Written by Marc
Over the past years, I have been in contact with literally thousands of real estate brokers. In my past life, I was managing numerous leases across North America, so it was common to receive phone calls from brokers each day, pitching their ideas on how they could help us in our next leasing deals.

negotiating a new leaseNegotiate Your Leases

I remember one such speech from a broker that came to visit me to talk about the strategy he had to help his clients that were tenants in various building types. His strategy of negotiating leases resumed in going after the landlords of his clients and letting them know that his clients would move out of the building if the landlords did not provide his clients with an immediate rent reduction. Providing to the landlords a threat of losing a tenant against a rent reduction. In addition, this was not done at the end of a lease, but at any point during the existing lease period. I remember asking the broker how successful he was and he assured me that he did win a rent reduction almost all the time.

I did not go into details with him because it was not a tactic I used for negotiating leases. In all fairness, I was not receptive to the idea of going after every one of our landlords and threatening to leave if we did not get what we wanted. After all, I believed that once we finalized our negotiations in good faith, we would honor our lease terms until our lease was up for renewal. Then we could negotiate again and consider other sites.

Feedback on Strategies Used by Others

However, in negotiating our leases, the idea of telling a landlord that we would move if we did not get what we wanted was not something new. I was already hearing this from a number of colleagues in different business units of the company I was working. Sometimes it was a general manager of a business unit that was desperately seeking ways to reduce his/her costs right away, other times it was a VP of a division that noticed that one of his/her business units was spending more per square foot than the average. Regardless of the situation, the requests and proposals were pretty much the same: You should go back to the landlord and tell him/her that we will move out if we do not get a rent reduction.

Of course, this type of lease negotiation can only be done when the lease is actually ending, as trying this during the term of the lease will only fall on deaf ears for most landlords (unless you are in a situation where you face bankruptcy or something like that).

Nevertheless, even if your lease is up, trying to get a rent reduction on the sole threat of moving out has to be intelligently planned.

Negotiation

A few years ago, we had a manufacturing site we had leased for over ten years and were poorly suited for our needs. The site had been built as individual manufacturing condominiums and over the years, we had taken more space on a number of occasions and were now leasing a thin but very long space. Each time we needed more space, the obvious decision was to lease the condominium next to our space and each time the landlord helped us with this, relocating other tenants to accommodate our needs. Our space went from a relative square shape to a long rectangular one. Over time, efficiency was reduced because of the shape of our site. Materials had to travel a much longer distance than if we had been leasing a more square space and the equipment layout was less than optimal. We started to look at other sites but after a few months concluded that, we could not find anything in the market, at least not anything at the rates we could afford for that business unit. We also had to consider the cost of moving our equipment, which was not a small amount. People started to run the numbers and found that if we could reduce our rent by 20%, it would make more sense to remain at the site, even with the efficiency loss that came with our current site than to spend money to move our equipment to another site and pay higher rent.

So, naturally my colleagues asked me if I could renegotiate our lease terms by telling the landlord that we would be moving out of our current space if he did not provide us with a 20% rent reduction when our lease expired.

Our lease was ending in less than one year and I knew that if we really had to exit the building, it would take us almost a full year to setup our operations elsewhere.

I went to see the landlord to let him know that we were considering, among a few other scenarios (trying to avoid painting myself in a corner completely) moving out of his site at the end of our lease but that we could consider staying in his building if he would agree to reduce the rent.

Always Have a Plan B

Our landlord took my request and went back to do his homework. Many weeks passed by before I managed to reach him. When I did, he informed me that his other partner which owed the building with him was happy to see us leave since he felt our rent rate was much lower than the going market and that by having us exit the building, they could reconvert it back to manufacturing condos with higher rent. In addition, by having a number of smaller tenants, they would reduce their risk since they would no longer rely on one single large tenant. He told me he was now waiting for our lease to expire to start their renovation work on the building.

Obviously, this is not what I wanted to hear. In the end, we had to go back, tell the landlord that we wanted to remain in his building and agree to his conditions. We learned that they were not bluffing and had hired professionals for the renovation work already. For the landlord, it made sense to drop us and I probably would have done the same myself. In retrospect, we negotiated with no advantage and no real backup plan. After that, whenever we tried to negotiate with landlords by telling them we were looking for other sites, I made sure we really had credible sites with which we could have lived with. A few months following this event, I needed to renegotiate an office space and I did use the argument towards our landlord that we were considering another site. However, this time we had a credible site; it was a serious plan B that we would have taken if we had not come to terms with our landlord.

In conclusion, when negotiating leases for your sites, if you plan to use arguments like walking away from a site, be ready to actually walk away by having a solid plan B in your back pocket, if not you might end up in a corner with no leverage.