Renegotiating Your Retail Space Lease: When, Why And How to Approach Your Landlord

Whether you’re a small retailer selling hand-made products in a tiny shop or a larger one looking to take your business to the next level, the annual rent for your retail space will be one of your most significant business expenses. If, like many entrepreneurs, you signed your landlord’s cookie-cutter triple net ease without asking a commercial real estate agent or lawyer specializing in lease negotiations to help create a counteroffer, you may find yourself experiencing sticker shock each month when your rent comes due. Even if you’re mostly happy with your contract and just want to tinker with it a bit before a renewal, renegotiating your lease could save you plenty.

Why Renegotiate the Lease for Your Retail Space?

There are lots of reasons to consider renegotiating your lease. Maybe you need to contain costs by placing caps on property taxes or maintenance expenses that have suddenly ballooned out of hand. Perhaps the paint and carpeting in your retail space are starting to wear, or the look no longer matches your brand personality. Or even though you like your digs, a suite down the hall that you’ve had your eye on for years is finally available, and you’d like to trade spaces. Or maybe, without realizing it, you lucked in on the perfect franchise location and want to lock it in with a longer lease term.

No matter the reason, if you’re a reliable tenant, chances are your landlord would rather keep you than lose you, and you might be able to get much of what you want by renegotiating your current lease.

Timing Your Retail Space Negotiations And Capitalizing On Market Factors

Renegotiating a commercial lease agreement takes time, so starting the process as early as possible is best and essential if you’re already having trouble making your monthly rent or if changing consumer habits have caused you to rethink or retool your business.

If you’re not in a hurry – although it’s riskier – staying on top of commercial real estate market conditions and announcing your desire to renegotiate during a market dip or after a recent vacancy in a multi-tenant building can give you extra leverage.

In the case of a renewal, lease renegotiations should begin at least 12 to 15 months before the lease for your retail space expires. The longer the lead time you have, the more alternate spaces you can evaluate and the more written Offers to Lease you can collect from other landlords. Not only will you create a competitive environment where all landlords need to put their best offer on the table to win your business, but if your current landlord never intended to renew your lease, you’ll find out quickly and be more prepared to move.

Don’t Undervalue Your Bargaining Strength

A variety of factors will determine your bargaining strength when renegotiating the lease for your retail space. These include:

Overall tenant vacancy and turnover rates
The higher the tenant vacancy or turnover rate in the building you currently occupy, the more crucial it will be for your landlord to retain your tenancy. Investors in commercial real estate want predictable monthly returns on their investment, and when tenant suites sit empty, they get bills for property management, maintenance and utilities expenses instead. Not a best-case or desired scenario.

The percentage of the building you occupy
The larger the percentage of the building you occupy, the greater your vacancy’s financial impact on the landlord. If the property has multiple tenants and your business occupies a large, ground-level retail space, even if other tenants remain on the rent roll, the conspicuous absence of your operations at street level and the loss of your cost contributions on the property’s balance sheets gives you significant clout.

Your tenant history
Long-term tenants are valued and retaining them is vital to creating monthly cash flow and profit.

Amplify Your Bargaining Strength With the Help Of a Broker

Hiring someone to represent you in a lease renegotiation can generate more success and higher returns.
Experienced commercial real estate professionals can examine your current lease, identify areas that need to be improved and help you create a new offer that brings costs down significantly. They can act as your advocate and communicate with landlords in ways that won’t cause your previously positive relationship to suffer, even as you score wins.

Brokers can help you locate alternate retail space to occupy, not only so you can create the competitive scenario we outlined above but also to give you options should negotiations lead nowhere.

Your desired area’s market conditions and retail space availability may have changed since you signed your last lease. Other landlords might now offer better contract terms, and new locations might offer lower taxes, lower rent and more valuable amenities. You can bring these factors to the table during your lease renegotiations or keep them in mind if you need to move.

Brokers typically charge a three- to six-per-cent commission for their services, based on the total value of the lease, so it’s essential to ensure that your renegotiated lease delivers more business value or saves you substantially more than money the value of the commission, or you’ll simply trade building costs for broker ones.

Renegotiation Requests for Your Retail Space

Lease renegotiations involve give-and-take, so it’s imperative to prioritize the items that create the greatest savings for your business or allow it to operate more efficiently. This enables you to be firm where you need to be and flexible where you don’t.

Items that will save you money include:

• A reduced or fully-returned initial lease deposit.
• A 10- to 15-per-cent reduction in your base rent and a deferral of the difference to the end of your lease.
• Free rent or rental allowances that you may have missed out on initially, so you can control costs until the renegotiations are finalized, and in the case where a landlord may be unwilling to reduce the base rent for fear it will reduce the amount future renters pay.
• NOTE: A single month of free rent annually would result in a total rent savings of 8.3 per cent.
• Free staff parking or Wi-Fi.
• Rent adjustment or elimination for a specified period, based on you and your landlord sharing a percentage of your monthly sales.
• If you’re in a net lease, a cap on expenses such as property taxes, maintenance, utilities, common area costs, etc.
• A reduction in the size of your retail space /or the ability to sublet all or part of it.
• A reduced lease term.
• Severance of the lease so that you can move into a more affordable retail space in another building owned by your landlord.
• A lesser penalty for early severance of your lease.

Items that might allow you to operate more efficiently include:

• Adding a clause that bars competitors from leasing in any building you rent.
• Extended hours of service in response to consumer demands.
• Leasehold improvements better-adapted to your current needs, including new carpet and a new paint job for your retail space.
• Access to specialized common spaces /or janitorial services.
• First refusal to lease a nearby unit for expansion.

Have Several Backup Offers Ready If Your First One Is Refused

If your landlord dismisses your initial renegotiation offer, be sure you have second and third offers ready. Once your landlord sees you’ve prepared backups, it’ll help convey your intent to continue as a tenant, and they may be more prepared to bargain as a result.

If your landlord outright refuses your request to renegotiate – if you and your real estate agent have been scoping out and running the numbers on potential new locations for your retail space – you should know where you need to relocate to and when.