7 tips for landlords negotiating commercial lease renewals

While there’s no one-size-fits-all approach to successful negotiations, Mr O’Neill, the director of Rethink Investing, has acknowledged there are a number of considerations investors should take into account to ensure they are achieving maximum value in any lease agreement.

1. Raising rents and lengthening leases

The most impactful approach to extracting more value from your commercial assets is by raising rents and lengthening lease terms. With the current market conditions favouring rent increases, now is an ideal time to capitalise on this opportunity. Long-term leases provide security and continuity for both tenants and investors, and they enhance the overall value of the property.

2. Early renewals can benefit both parties

Approaching tenants well in advance of the lease expiration to discuss early renewals can be advantageous for both parties. For tenants, a longer lease term can increase the value of their business, making it more attractive to potential buyers if they wish to sell. For investors, securing an early renewal means greater stability and potential for rent increases without the need for extensive negotiations closer to the expiration date.

3. Value of continuity in leases

Longer leases provide certainty and reduce uncertainty for tenants, especially when they are looking to grow or sell their business. A short-term lease may deter potential buyers, affecting the business’s valuation negatively. The continuity offered by a longer lease can add significant value to the tenant’s business and contribute to a healthier tenant-landlord relationship.

4. Caution with lengthy leases

While longer leases can be beneficial, investors must carefully assess market conditions and rent escalation clauses. A 10-year lease might seem enticing, but if rents are rising rapidly, a shorter lease with regular rent reviews could prove more lucrative. Striking the right balance between security and potential for higher rents is crucial to maximising value.

5. Timing of negotiations

The timing of lease renewal negotiations plays a critical role in their success. While some investors prefer to let the lease lapse and then initiate discussions, others opt for early negotiations to provide tenants with ample time to consider options. The latter approach can be advantageous, as it demonstrates proactive management and allows for a more collaborative negotiation process.

6. Avoid desperation

Avoid approaching lease renewals from a desperate position, as this can weaken your negotiation stance. Give the impression that you have other interested parties, even if it might not be entirely accurate. Tenants are more likely to consider favourable terms when they perceive competition or a sense of urgency on your part.

7. Safety in numbers

If you own a multitenant commercial property, having multiple tenants can offer safety in numbers. Even if one tenant decides not to renew, the overall impact on your investment will be minimised. This scenario enables you to negotiate from a position of strength, ensuring better outcomes for lease renewals.

All in all, maximising value through lease renewals is a strategic process that requires proactive planning and effective negotiation skills.

By focusing on rent increases, longer lease terms and approaching tenants with a well-prepared negotiation strategy, commercial property owners can extract the full potential of their assets. Whether it involves considering market conditions or understanding tenants’ needs, the right approach to lease renewals can lead to increased income and improved asset performance.

Listen to the full conversation on Inside Commercial Property here.