Renewing a Lease in Advance

Published on Saturday, 7 September 2013 14:40:56    Written by Marc
When in charge of lease management within a large company or organization, it is only a question of time before someone from a division, department or group comes to you and asks if they could or should renew a lease ahead of time; meaning well before the agreed renewal date. I have been in this situation on many occasions where for example the head of a department or business unit would ask me if there would be some benefit for the company to renew and extend our lease ahead of schedule. The idea of course was usually to find savings. However, sometimes it was also to guarantee a strategic advantage over the Landlord by making sure we would be able to extend our lease under favorable conditions. It is never wise to wait until the end of a lease to negotiate!

IMG_4142Therefore, over time, I found there were three main benefits for the tenant to renew a lease well before the due date:

  • To save money somehow
  • To insure that we keep our space
  • To add or remove something in the lease now

Let us look at the second reason, "To insure that we keep our space." Most leases in place include options for extensions. Why would you consider extending you lease at this time? Well, sometimes buildings are sold or converted or might be in the last renewal option and we might need to insure that we can keep the space for another term. Especially if a company is planning to invest money in the leased space, like in doing an office renovation for example. Renewing the lease in advance can reassure the tenant that a new lease will be in place long enough to amortize the renovation cost. If there are only two years remaining to a lease, renewing it now for let us say a ten-year period will give the company a full decade to amortize a new renovation.

The third reason in the above list ‘to add or remove something in the lease now’ may not be so obvious, but sometimes, over time, especially if a lease has been renewed or extended a number of times, it is possible that the lease no longer suits the tenant like it used to. Some clauses that the tenant might have agreed to in the past may no longer make sense while others may now need to be added. For example, the original lease may include a clause that forces the tenant to bring back the site to its original state, but four or five renewals later the tenant may not want to be forced to restore a site to what it was twenty years ago. Another example is the security deposit required by the landlord that may have been a legitimate concern initially because the tenant was a start-up company but now 10 or 15 years down the road the tenant having grown into a profitable business, this clause might no longer be relevant. These are only two examples, but there are numerous reasons why a tenant would want to renew a lease in advance in order to alter some of the clauses right now and not wait for the existing lease to come to term.

Now, we have talked about various reasons why a company or organization would want to renew a lease ahead of time, but we did not talk about monetary reasons. This brings us to the reason number 1 of our list above: ‘To save money somehow’.

Obviously, the idea of saving money is always interesting to companies and organizations. If renewing a lease ahead of scheduled could automatically guarantee a saving, everyone would do it all the time. However, it is not necessarily the case and there are no "one size fits all" here, as every situation is different. From a landlord’s perspective, having a tenant want to renew a lease ahead of schedule is often a good sign. It means the tenant not only wants to remain in the space, it sometimes indicates to the landlord that the tenant needs to remain and this can give a certain advantage to the landlord when it comes time to negotiate. If the request from the tenant is made a long time before the lease ends, say four years on a 10-year lease, the landlord may be reticent in opening the lease so early. After all, he is getting his rent each month and still has lots of time ahead, so why would he want to open a lease and potentially be forced to give something up to the tenant. A tenant must remember that there is always some kind of give and take associated with such a transaction. In addition, probably the best give in such a case is term. If the tenant increases the term, then this provides longer revenue stream to the landlord. For example, if there are four years remaining on a 10-year lease, renewing the lease for a new 10-year lease will give the landlord a full six years of extra term. This can be good if the landlord needs to refinance his building, or even looking into selling it. Negotiating an extended term is used by the tenant to entice the landlord to renegotiate, and at the same time seek a rent reduction or change some unwanted clauses in the lease. The tenant may also be in a situation where he needs to expand or needs to give back some space. If the tenant needs more space and is planning to do improvements to that additional space, then it could make sense to renew the lease on the existing space now, get a new term (for five, seven, or 10 years for example) so that all leased space (the existing space as well as the expansion space) have the same term. By doing a single lease, the tenant could even try to get some rent reduction for the existing portion of space, at least for the remaining two years.

Whenever the tenant is leasing either more space (by adding on space) or leasing for a longer period of time (by extending a lease), he should see if there is a possibility to get some kind of monetary return, either by a rent reduction, a tenant inducement (in either free rent, money or renovation/construction work) in addition to using the opportunity to review all the lease clauses to see if some should be removed and other added. This is the time to ask the landlord because the give to the landlord is interesting.

A word of advice for tenants, if you are planning a renovation in the leased space, it is probably a good idea to negotiate a new lease prior to even starting the renovation work. Get a new lease in place or at least the terms of the lease sealed before the landlord gets word about your renovation intentions. Because if you go ahead and renovate a site without securing the term, this will send a strong message to the landlord that you are vulnerable. Come renewal date, he will see you with a large smile because he will be in power. Most landlords know that companies will not lease a space after they renovated it, so they actually become good at getting wind of which tenant is planning what type of work. Whenever my colleagues where planning any type of major renovations to a leased site, I would always ask them to negotiate something with the landlord before and then let the word out about renovations.

On a final note, when doing lease management, I was often asked by my colleagues if it was possible to renew a lease based on their feeling that the market prices would go up. I do not really recommend opening leases to try and ‘time’ the market prices because this adds an extra layer of complexity and it is really something no one really has any control over. If a tenant renews a lease in advance and extends the lease for a number of years simply out of fear that the market prices will go higher, he or she may be in for a disappointment if the rates actually go south afterwards. I would prefer and try to get the best rates and the best lease clauses now than try and predict market prices.