When To Renew and When to Cancel Your Commercial Lease
Bill Himmelstein, CCIM, CNE
Founder & CEO at Tenant Advisory Group, LLC I Business Adviser I Strategic Connector
Moving your company location can definitely be time-consuming, not to mention costly. This is precisely why many tenants struggle with the decision of canceling their commercial lease or renewing their contracts. There are many factors to consider, and you have to ensure that you weigh all your options. This will ensure that your decision to renew your commercial lease does not backfire, and if you choose to cancel the commercial lease, that it benefits your business in the long run.
Often, commercial lease renewals follow a pre-configured path wherein the previous terms are adhered to without any changes. But oftentimes, it’s more beneficial for the tenant to negotiate new lease terms to ensure that they get the best deal possible when renewing their commercial lease contract. Keep in mind, sometimes renewing your commercial lease can be even more vital to the longevity of your business than when you first signed the first to begin with.
Renew Commercial Lease Or Cancel It: Which Should Be Your Choice?
Before you renew a commercial lease, it’s crucial to get a better understanding of what the lease and proposed terms entail. With a commercial lease renewal, tenants get the opportunity to renew their lease agreement within a set time frame which is usually within a year prior to lease expiration.
Typically, when you renew a commercial lease contract it’s done as per fair market value, aligning with comparable transactions. However, if you have the right broker on your team then your renewal rate won’t be subject to the market prices at the time of renewal.?
Watch the video below as CEO and Founder of Tenant Advisory Group, Bill Himmelstein explains the key factors each landlord should consider before making the decision to renew or cancel their existing cre lease. Also in this video, learn what renewal terms your lease should contain to give you the best rates in your market.??
Commercial Lease Renewal Factors
Renewal is most beneficial when the space works for your business from multiple perspectives.?
If your current space satisfies all pertinent needs/goals of your current business, and that of the foreseeable future, then renewing your current lease is the best option.?
Renewing your current lease will oftentimes be the cheapest and most productive option for your business. Also, by renewing your current lease the landlord no longer has to spend money on costly build outs to outfit the space.?
This cost savings allows tenants to utilize that money on making desired changes to the space as well as focus those dollars towards lowering the rental rate – or getting more free rent in their renewable agreement.?
Renewing your current lease often proves to be the cheapest, simplest, and most beneficial option for both the tenant and a landlord.?
Flexibility In Rental Rates
Depending on your original lease agreement, when you renew your commercial lease contract, you will get the opportunity to renegotiate your rental rates according to the “then escalated market rate”. This affords tenants the privilege of capping their rent expense, as well as keeping the option available to potentially lower their rent rate if the market conditions support the decrease in rates.?
Keep in mind that commercial real estate is highly volatile and tends to fluctuate. So being able to cap your maximum rental expenses is a huge financial advantage for your business in the long term. With the clause to renegotiate at the “then escalated market rate” there’s always a chance that you might secure a lower rental rate than your current rate. You can also seek out other competitive offers from other landlords as leverage to negotiate more advantageous lease terms for your company.?
Landlords understand that retaining you as a tenant will be the most profitable and beneficial option for them. Therefore, it’s likely that landlords will work with you on developing a better deal compared to your initial commercial lease and other competing offers.
“The easiest and most effective thing a landlord can do in terms of their profitability, is to retain existing tenants”
– John Buck, Chicago Developer
Room For Improvements and Renovations
When renewing your commercial lease, think of it like becoming a brand-new tenant of the building all over again. Because if the landlord had actually gotten a new tenant in your property, they would have made at least some generic cosmetic alterations to the space. So, think of your renewal as your opportunity to make some minor alterations as well.?
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It’s plausible that while the commercial space suits your needs perfectly, there’s some room for improvement to make it even better suited for the evolving needs of your business.?
You can use the lease renewal negotiations for this purpose and potentially secure some additional tenant improvement dollars in your new lease.?
When You Should Cancel The Commercial Lease Contract?
Even if relocating takes a sustainable amount of time and resources, sometimes it’s the only option for the longevity of your business.?
If the space just isn’t working for you. Meaning:
Or if you’re not happy with the landlord.?
They’re not fixing things that break. Or maybe they’re not negotiating with you, and they’re not being reasonable in the terms they’re trying to offer you.?
In these cases, it makes the most sense to go ahead and move on from that lease and that building and relocate your company.?
The Space Is Not Suitable
It could be that your office is not of appropriate size or your requirements have changed over time. Perhaps your business is expanding, and the current space is no longer enough to accommodate your team. It could also be that you are downsizing and have a lot of extra space that you no longer need.?
It doesn’t make sense to pay for utilities and amenities that don’t benefit your business. In this case, it’s better to refrain from renewing your commercial lease.
Sometimes, everything’s right with the space, but it does not work for the employees. They aren’t motivated to come to the office. Naturally, your business cannot thrive if your employees aren’t content. Productivity is bound to suffer. So it will be better if you change your location to something more attractive for your team.
Not Satisfied With The Landlord
This is one of the most significant reasons not to renew commercial leases. A lot of times, landlords fail to meet tenants’ expectations. They are negligent and fail to uphold their part of the deal.?
Perhaps you are facing maintenance issues in your building, or there are some safety hazards that you have noticed. In this case, it’s clear that you and your landlord aren’t on the same page. Trying to work something out will only leave one party bitter. So it’s better for everyone to move on.
Furthermore, don’t hesitate to cancel a commercial lease contract if you feel your landlord is not presenting acceptable terms during renewal negotiations. Commercial leases are typically for a longer period, and you wouldn’t want to be stuck with a lease that will put a dent in your business.
To Renew My Commercial Lease? The Final Verdict?
It all comes down to your requirements and the needs of your business. If the space is working well for you, there’s no reason to relocate. However, if the space is not serving your business or your employees, then it may be time to move on.?
Either way, it’s a big decision that should be made with an experienced cre broker by your side. Be sure to have a cre broker on your team that will advocate for your tenant rights at all times. Tenant Advisory Group is always more than happy to consult with you about your commercial real estate needs. Email us today. We are ready to connect with you!
Also read:?The ROI Of Leasing Traditional Office Space