Wednesday, March 30, 2016

All You Need to Know About Your Options for Renewal

Congratulations… on having just closed and purchased a 6 unit commercial plaza and the management of it going forward. Your first order of business is to negotiate a RENEWAL with an existing tenant, with a term expiring 6 months out. It all begins with a look back at the Lease Agreement and a review of the RO it contains.

What’s INCLUDED in the RO? The key elements most often include the following:

  • A notice period of intention to renew (ie. 6 months) and typically in writing
  • Term – either specified as a fixed yearly term or possibly a range (ie. 3-5 years)
  • Rental Rate – in some cases as a pre-determined amount
  • To Be Negotiated – more often, at rates to be negotiated at the time of renewal
  • Rate Capping – even if rates are higher, capped at a certain threshold (ie. +5%)
  • Arbitration – a mechanism to establish a rate through a 3rd party if each side disagrees

BENEFITS – In actuality it is more important to the Tenant, as it protects their rights to the space and possibly their ability to negotiate in conditions which favour the Landlord. The more detailed the RO and specific based on future rates, the better for the Tenant in protecting their interests.

FUTURE RATES – this is the ‘Canary in the Coal Mine’ and where many a battle is waged. Landlords expect to achieve market rent at the time of renewal, and generally resist capping or fixing rates ahead of the renewal. Tenant’s on the other side - want cost certainty going forward on renewals and want to know they will not be faced with substantial rate increases in future terms. The option of ARBITRATION is a must to be included in any deal, to make sure a ‘fair market rent’ can be achieved at time of renewal. Keep in mind that Arbitration Hearings cost money, and it can be expensive to involve this 3rd party solution.

COSTS TO STAY OR GO? – For the Tenant - costs to relocate can be substantial, not to mention the disruption to business and your customer flow. For the Landlord – costs can include loss of income through a vacancy period, expenses to re-fit the unit for another tenant, and ultimately a hit to the return on the property.

Renewal options may not seem important (to either side) when you initially sign the initial lease. But clearly, it’s a future planning matter and you need to consider it carefully before finalizing your deal – and again, both Landlord and Tenant.

Just a click / call away from discussing our latest investments here in Windsor – Essex!

Mark Lalovich
Office: (519) 966-0444
Cell: (519) 259-5434

No comments:

Post a Comment