Ask an ExpertFranchiseeMay/June 2018

Q. What are the do’s and don’ts for franchise tenants when it comes to commercial lease renewals?

Approximately two million commercial lease renewal transactions take place every year in North America. Whether a franchise tenant is leasing commercial space in a strip mall, shopping mall, or in a standalone building for a business, he/she eventually will have to face a lease renewal negotiation with a landlord. Starting with the end goal in mind and planning far enough in advance will make this process much easier.

Most landlords push for a rent increase on a tenant’s lease renewal. This is normal, and something you should anticipate. Much can transpire in a five- or 10-year lease term between when you moved in and when you need to negotiate a lease renewal. Negotiating a lease renewal is not an overnight process, and involves a number of steps:

Do create competition for your tenancy

Franchise tenants should negotiate on multiple locations simultaneously – especially with lease renewals – even if they don’t want to move. Create options and play one landlord against another. Share with each landlord that you are receiving other proposals. This often creates a bidding war between landlords, with you winning in the end!

Do start the planning and site selection process well in advance

For existing businesses and lease renewals, begin 12-15 months in advance. This allows ample time for negotiating, completing paperwork, searching for alternate sites (if necessary), and accounting for Murphy’s Law.

Do keep success quiet

Landlords often try to raise the rent due to a franchise tenant’s success. If doing well in a particular location, a tenant will likely not want to move, even if he/she can afford the rental increase. Some agents and landlords may try to take advantage of some tenants knowing how expensive it can be to move and set up a new business.

Do talk to other tenants

For lease renewals, talk with other tenants in the building who have recently renewed leases. Ask how these renegotiations went, and what the landlord was willing to agree to in terms of rental rates and further tenant incentives.

Do negotiate for lease renewal incentives

For some reason, franchise tenants neglect to, or are simply fearful of negotiating for lease renewal incentives. If a lease is expiring, a franchise tenant should ask him/herself what inducements (eg: free rent/tenant allowances) would the landlord give to a new tenant just coming into the property.

Don’t have false optimism

If a business isn’t faring well, but the tenant wants to renew his/her lease anyway, this is false optimism. Unless the franchisee changes location or something else about the way he/she does business, he/she should not realistically expect the next five years to be better than the first five years. Moving can be difficult, frightening, time-intensive, and expensive; however, sometimes, this is absolutely necessary.

Don’t accept an inappropriate lease length

For new franchised businesses, an initial lease term of five, seven, or even 10 years is typical. However, when renewing, a franchise tenant should not automatically sign for that same or similar time frame without considering his/her own future. A business may be sold and/or an entrepreneur may retire. Don’t get locked into a long-term lease renewal unnecessarily.

Don’t settle for the same rental payment

Achieving a rent reduction on a lease renewal is a very real possibility. If the landlord is leasing space to new tenants at less than what the tenant is currently paying, a rent reduction should be achievable. If the franchise tenant’s current rental rate is artificially high because of his/her last tenant allowance, a rent reduction on the renewal term could also be in order. Again, tenants should talk with other tenants who have recently renewed or moved in to see how much they are paying.

Don’t allow the landlord to retain the deposit

If the franchise tenant has paid the landlord a deposit, he/she should ask for this back upon the lease renewal date. Franchisees can prove themselves as responsible tenants over their initial term. Why should the landlord keep this money?

Don’t disregard your operating costs

Having the lease and/or operating costs analyzed are effective ways to keep the landlord and property manager accountable. Frequently, franchise tenants pay inflated Common Area Maintenance (CAM) because of padded or miscalculated operating costs. Often, it can be advantageous for groups of tenants sharing the same property to unify for an operating cost analysis.

Don’t exercise options

Even though the franchise tenant has a renewal option, he/she may not want to exercise it – especially if the renewal term’s rental rate automatically increases or can’t decrease. If a tenant is certain that the landlord wants you to stay and market rates (the “going rate” in the neighbourhood) have softened, he/she may want to negotiate the renewal from scratch.

Dale Willerton and Jeff Grandfield
Commercial Lease Consultants
The Lease Coach