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Tenancy Management Opportunities

Have you ever wished you could change a term or condition after signing your lease? Tenants often assume that once the lease is executed their fate is sealed but it is likely that every tenant reading this article has a number of re-negotiation opportunities included in their lease.

A lease defines the terms and conditions under which a landlord shares hundreds of property rights with a tenant on a temporary basis in exchange for rent. Because a lease is a static agreement written to describe a dynamic process, inevitably something that seemed like “a good idea at the time” becomes a problem when the point of view shifts. This creates an opportunity for a leverage position.

Understand the realistic power of the leverage position and how to use it to affect positive change.

The strength of each leverage position depends on specific circumstances at the time and how the situation is presented and administered. You know what you need. Recognize and understand your leverage position, then use it to create change in a prudent manner. Working with the landlord helps keep focus on the solution rather than the problem. A savvy advisor will be instrumental in helping you navigate through a re-negotiation.

Recognize the three classes of leverage opportunities.

Obvious and certain leverage positions include rights to renew the term, assign the lease, increase or reduce size, display signage, and early termination. Usually these rights are associated with a certain time line and operating mechanism, and are clearly stated in the lease.

Example 1: Use the renewal negotiation process described in your lease to set your rental rate, and possibly address other tenancy issues.

Example 2: An option to give up space can be used to reduce overhead costs by either exercising the option and reducing the premises area, or by agreeing not to exercise the option in exchange for other concessions such as reduced rent.

Silent and sudden leverage positions include presentation of estoppel certificates, broad use clauses, landlord refinancing, premises relocation, and landlord ownership change. These opportunities arise suddenly due to changing circumstances and are often challenging to identify. The rule of thumb: when your landlord approaches you with something that seems to involve changing a lease term or condition, ask yourself “is this a threat or an opportunity?”

Example 1: Complete that estoppel certificate – and know how to use it.  One client retrieved a two-month prepaid rent deposit, which the landlord had previously refused to acknowledge, in exchange for completing an estoppel certificate.

Example 2: A tenant’s right to terminate their lease can create a very potent leverage position if it prevents landlord from refinancing their property. One client agreed to defer the early termination provision in exchange for the landlord agreeing to install an elevator. This corrected negative patient flow to a second story practice.

Example 3: See your landlord’s right to relocate your business as an opportunity. Cooperate with the landlord during a relocation – in exchange for better space, new leasehold improvements and better signage!

Researched and exploited leverage positions can be created by actively reviewing existing, documented lease terms and understanding how to monitor them. Common examples include additional rent and premises area audits.

Example 1: Faced with no options to renew, high rent and poor signage, a tenant demonstrated that its premises actually measured 947.5 square feet rather than the 1100 square feet indicated by the lease. This equalled an accumulated rent overpayment of more than $20,000. Instead of suing the landlord, the tenant agreed to a rent adjustment to compensate for the overpayment, as well as having renewal options added, and significantly improved signage installed.

Example 2: A quick additional rent audit resulted in a cheque for almost $30,000 being issued to one tenant. The landlord’s math was wrong.

A properly negotiated lease will ‘plant’ all three classes of leverage opportunity that can be triggered by circumstances likely to occur at some point during the tenancy. If you have a lease issue, remember that you do have opportunities to administer your position during the term. You should have your lease reviewed by a professional commercial real estate advisor to inventory the strength and type of leverage positions that will be available to you. Plan to use the obvious and certain leverage positions as time passes. When a silent and sudden or researched and exploited opportunity arises be sure to seek the expertise and service of a qualified professional.

 

Written by
Ian D. Toms and Jennifer J. Miles

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