RENEWING THE RIGHT WAY
Best-Practices Guidelines and Issues to Consider for a Tenant renewing its Lease
By: Bruce G. Rosen, Esquire ©2013
Introduction. A tenant may renew its lease either by a right to do so under its existing lease, or as a result of negotiations with its landlord. In either case, there are several “best practices” the tenant may wish to adopt, as well as several issues to consider.
Best Practices. Tenants that negotiate the best lease renewal terms are well prepared by having an experienced team early on in the renewal process and by being familiar with the procedures for lease renewal.
Your Team. Knowledge is power. Involve an experienced real estate broker early on in the renewal process. This benefits even those tenants who are certain they will extend their current location, and have had preliminary discussions with their landlord on rental rates. Brokers are your best guide to what alternative space is available in a given location, and can let the tenant know if other landlords offer materially better rental rates or concession packages (like free rent, a build-out allowance or a moving allowance). Tenants should also protect their interests by engaging an attorney with commercial leasing expertise.
Procedures. Long before the relevant date arises, a tenant should be familiar with the timing and procedures applicable to its lease renewal.
These may include:
1. How early the tenant may give its renewal notice.
2. The outside date (deadline) by which the tenant must give its renewal notice.
3. Any conditions applicable to the renewal (e.g., occupying 70% of the original premises).
4. What the rental rate will be for the renewal term (e.g., 95% of fair market value).
5. If there is a floor on the rental rate (i.e., not less than last year’s rent).
6. The timing and procedures for landlord and tenant to negotiate the rental rate.
7. If there a method to resolve disputes on fair market value (e.g., 3-broker method).
By knowing the procedures, and any outside deadlines, a tenant then has the time to get market-data (and possibly competitive offers) from its broker, so it can make an informed decision.
Key Renewal Issues. Several significant business and legal issues arising in even seemingly basic lease renewal transactions are discussed below.
Renewal Amendment. Always confirm the details of a lease renewal in an amendment signed by both parties. Even for straight-forward transactions, the tenant will benefit from the clarity that an amendment provides.
What are the Renewal Terms? If not already specified in the tenant’s lease, a tenant should clearly set out the length of the renewal term, the base rent, rent escalation factor, and details for operating expenses and taxes (for net leases).
Base Year Issues. In leases where the tenant pays increases in operating expenses, taxes and insurance over the amounts of such charges in a “base” year, a tenant should negotiate for a new base year to apply to those charges during the renewal term. In addition, the tenant should require that the base year charges be grossed-up (i.e., increased) to reflect 100% occupancy, unless the tenant is fairly certain the building is fully leased (or nearly so).
Landlord Obligations. The renewal amendment should address any issues the tenant may have had with landlord’s maintenance in the past. If the landlord has promised it would refurbish the lobby, elevators, or make any other improvements, the tenant should makes sure to address such obligations in the renewal amendment.
Lease Clean-Up. Tenants should use the lease renewal as an opportunity to clean-up their lease by updating any notice addresses that may have changed, as well as by making sure that the renewal amendment accurately references all prior lease amendments and any significant side-agreements it may have with the landlord.
Lease Improvement. Tenants with negotiating leverage can use their renewal to improve their lease rights. They can negotiate for expansion rights, a right of first refusal to lease vacant space, or a right for further lease renewals. Such tenants may also consider addressing permitted transfer rights (e.g., the right to sell tenant’s business and transfer its lease without landlord consent). Tenants that have made significant alterations to their leased premises may use their renewal negotiations as an opportunity to have the landlord confirm what improvements (if any) the tenant must remove when the lease term expires.
Other Issues. Tenants with negotiating leverage may also consider requiring the landlord to confirm the tenant is not in default under the lease. All tenants, if faced with a provision that protects only the landlord, should request the language benefit both parties. Lastly, consider the impact of the lease renewal on any lease guaranties and parking rights.
– Bruce Rosen
REAL ESTATE COUNSELORS, PLLC
DC | MD | VA | NY www.RECDC.com
Real Estate Counselors is a boutique law firm specializing in commercial real estate and business transactions.
Bruce Rosen’s practice includes representing government contractors, office tenants, retail tenants, landlords and developers. He is the Managing Partner of Real Estate Counselors. Prior to that, he was with the law firm of Akin, Gump, Strauss, Hauer & Feld.