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How to renegotiate your lease effectively?

Joanna Sinkiewicz
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Can you expect to bring costs down by renegotiating your lease? By how much? 10, 20 or 40 per cent? And how likely are you to persuade your landlord to have your leased space upgraded? The answer is straightforward: the better you are prepared for talks with your landlord, the more effective and successful you will be in renegotiations – says Joanna Sinkiewicz, Partner, Head of Key Clients & Tenant Representation, Industrial & Logistics Agency, Cushman & Wakefield.

The Polish industrial market is dominated by fixed-term leases with most tenants opting for three- or five-year lease periods. In BTS (built-do-suit) schemes, leases tend to be made for seven, ten or fifteen years. When the lease is nearing expiry, the tenant is at a crossroads: to continue with the current landlord, move to a different location or look for an owner-occupied building or a BTS scheme. There is no universal solution to this dilemma and it all comes down to the tenant’s situation, requirements and priorities. If the currently occupied scheme meets location and functional requirements, most tenants will choose not to move, expecting to renegotiate more favourable lease terms instead. For such negotiations to be successful, you need to be well-prepared and to begin them early enough. A tailored approach is required in each case where a professional consultant will help explore all potential market opportunities.

EXPERT’S TASK

A thorough review of the tenant’s situation is a starting point for renegotiations. An expert begins with a review of the tenant’s lease agreement and other relevant documentation to ascertain dates, lease termination conditions, and automatic renewal or early termination options. Some tenants don’t read lease terms and conditions carefully enough or simply forget them, putting themselves at risk of a serious financial loss. In addition to the document review, the expert examines the tenant’s needs and preferences, considering the tenant’s current location, business operations, development plans and expectations.

Key issues to review:

  • Preferred legal form: freehold or leasehold
  • Suitability of a location for business purposes and access to the labour market
  • Alternative locations
  • Building’s standard and technical specifications
  • Commercial terms
  • Other relevant lease terms and conditions

Following the above review, the expert and the tenant jointly assess the extent to which the currently occupied building meets the tenant’s requirements. In the next phase, the expert prepares preliminary scenarios of potential solutions.

Another important step is a thorough market analysis considering the tenant’s needs. While everything has its own advantages and disadvantages, an experienced expert will help the client identify the pros and cons of individual solutions.

It is also the expert’s job to prepare a financial analysis of all proposed solutions, comparing them with the tenant’s current costs. Factors to be considered include differences in rents and potential relocation expenses that may also comprise spending on new investments, costs of staff reorganization and business interruptions. Another major burden is the cost of vacating space that usually needs be restored to its original condition, ordinary wear and tear excepted. As lease provisions in this respect tend to be interpreted in various ways, an expert’s support is then frequently required.

On the basis of the review of the tenant’s preferences and market opportunities, the consultant will help the tenant identify business objectives and preferred scenarios, and will prepare a negotiation strategy for talks with the current and other potential landlords. Following preliminary negotiations, two most favourable solutions will be short-listed to be discussed in the final round of lease negotiations.

WHAT CAN YOU EXPECT TO GET FROM RENEGOTIATIONS?

An upcoming lease expiry is a good opportunity to evaluate and reconsider the current warehouse space use. It is worth preparing for this thoroughly to take advantage of all potential opportunities. Both the tenant’s experience and the expert’s support are important in this.

Renegotiations may help bring down warehousing costs considerably. They are also an excellent opportunity to review the amount of the leased space and parking spaces, to check technical solutions in use and to sort out soft aspects of cooperation with the landlord such as the quality of services provided under a lease.

Through properly conducted renegotiations the tenant may take advantage of market opportunities and achieve continuity of operation and stability of business growth in its current location. They may also save the tenant the relocation effort, including relocation costs and organisational disruption.

A consultant will highlight various options and advantages of potential solutions. Being open to different options is good as you may be pleasantly surprised by the market. For example, in the course of renegotiations we managed to negotiate a 40% reduction in the effective rent for one of our tenants while another client who was about to extend its lease decided to relocate following our market review.

WHEN TO RENEGOTIATE A LEASE?

First and foremost, you should read all the provisions of your lease carefully. Landlords very often include a provision on automatic lease renewal. To avoid time pressure, it is best to consult and ask a lease specialist, at least six months prior to any automatic lease renewal, whether the lease terms and conditions are still favourable in the current market circumstances. The lease consultant will highlight the current situation and trends in the region, and will also help prepare for talks with the landlord, emphasise issues best to be avoided and ask difficult questions we want to be answered. Tenants can also renegotiate their current leases, but need to have the right arguments at hand.

Many tenants are still unaware of benefits to be gained through properly prepared and conducted renegotiations and do not hire professional consultants. Many businesses do nothing to amend their leases or choose to negotiate lease conditions on their own. Unfortunately, such negotiations are usually less effective than otherwise could be if conducted with professional support.

Author:

Joanna Sinkiewicz, Partner, Head of Key Clients & Tenant Representation, Industrial & Logistics Agency, Cushman & Wakefield