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Issues to consider when renegotiating a commercial lease

When it comes to residential rents, the Bay Area is notoriously expensive. However, the same is true for commercial leases. Commercial properties can earn a significant revenue stream for owners and landlords, and rent can be a significant operating expense for the business.

The stakes are high, so it is essential to negotiate a fair deal when it comes time to renegotiate the lease agreement. When new tenants come in, the rental agreement has a long list of terms that dictate what the landlord is responsible for and what the tenant is responsible for. Things can change over time, however, mainly if the terms of the previous lease lasted for several years. So, it may make sense that one or both sides want to renegotiate the lease.

What the landlord may wish to reconsider

The landlord’s goal is to continue or increase the profits from leasing the space. Rather than simply raising the rent, they may consider the following:

  • Look at the renter’s success and profitability and assess how much of it is due to the location.
  • Look at the cost of comparable space in the current marketplace and determine how much rents are going up in the area.
  • Determine if the tenant needs all the space or does it make sense to downsize and keep a valued tenant on the books while adding another to compensate for the potential loss of rental income.
  • Would a guarantor signing the lease provide peace of mind if the tenant’s business is in flux?
  • Is there a high demand for rental spaces similar to the tenant’s?

Tenants have their own priorities

Some are similar to the landlord’s, but the priorities may be different:

  • Does the space still work, or is it time to move into something larger or smaller?
  • Is the space now too expensive for your budget?
  • Research to see if the landlord has a lot of empty space.
  • Does the location still fit the business’s brand?
  • Has parking become a problem?
  • Talk to other renters in the building and elsewhere to see what they have to say about their lease.
  • Can the landlord provide inducements for signing another long lease?

Using a lawyer is essential

Lease agreements are often long and complex enough that neither the tenant nor the landlord fully understands the terms and conditions, particularly here in California. Changes in the laws can affect a contract, as will changes suggested by either side, so it is essential that clients have an attorney who drafts and negotiates lease agreements to review the changes.