Several key considerations for commercial lease renewal can help determine whether a commercial lease should be renewed. In this article, we share some of those. Anything from the property value to the tenant’s payment history can inform your decision. You should carefully consider each before concluding.

What is Commercial Lease Renewal?

A commercial lease renewal agreement allows a tenant to continue occupying the property after the original lease term expires. The lease is essentially extended for a new term, and the terms, such as rent, are often adjusted. To renew, you typically need to discuss the new terms with the landlord and then sign a renewal agreement.

Before agreeing to the terms of a new business lease, both the landlord and the tenant should consider conducting a market rent review. This keeps rent prices fair and in line with current market conditions.

When you do a market rent check, you look at the current rental rates for similar properties in the area and change the lease rate to match.

6 Tips to Negotiate Your Commercial Lease Renewal

Companies can examine the commercial real estate market again and use this knowledge to negotiate the renewal terms.

1. Look at the Market Value

A landlord can refuse to renew a commercial lease on most grounds. In most states, they don’t even need to give a reason for their decision. Tenants may have unknowingly waived their right to stay in their original contract, as well. Although you may have more specific legal considerations to deal with, there’s likely nothing stopping you from moving on.

The value of your property may have increased during the lease period. The resident may choose not to stay if you significantly raise your rates. From their perspective, they gain nothing from paying more to receive the same level of business. Still, they may simply be waiting for a market decline to gain more leverage during negotiations. Consider how much others in your area charge and how your tenant will react to an increase.

2. Check for Overdue Payments

You should consider denying a commercial lease renewal if your tenants regularly have overdue payments. While giving them some grace is reasonable because of the pandemic’s effect on brick-and-mortar companies, you can’t effectively operate with broken revenue streams.

Most organizations limit the payment period of unpaid invoices to 30 business days, making them outstanding. After that time is up, they become overdue. Many commercial leases consider a tenant late after the 5th of the month, and the language is very clear. A lack of income can affect your business operations. Sending reminders or negotiating extensions might be the best thing you can do at first, but choosing not to renew the lease is a good option if it keeps happening.

You can also consider leveraging technology to make your decision. For example, artificial intelligence can manage investment risk using datasets. It could cover the historical payment behavior of commercial tenants in the area to determine if a renewal is your best option.

3. Know Management Challenges

Tenants may decide not to renew because of property management issues. For example, slow responses to maintenance requests could make them feel better off at a different location. At that point, you must consider what changes they require to determine if you should proceed with the commercial lease renewal. Can you make the changes in time to make them stay?

You may need to consider alternatives to keep them if they’re displeased with the current management state. Automating your services may help convince them. For example, our tenant management software at STRATAFOLIO can inform you of lease escalations, display trends in your financials, keep investors in the loop, and manage all your properties in one place.

4. Cover Negotiations

Some people want to renew their lease because it gives them more room to negotiate a tenant improvement allowance. They can benefit from not paying out of pocket to upgrade their space. It also makes more sense to build on their current location rather than moving and starting over. Typically, they have more leverage when coming to you early to discuss staying.

The changes are usually structural or cosmetic, and you agree on the amount of funds in the lease renewal contract. While it benefits the tenants, the property itself may have improved as well. Most improvements they make will be built in, meaning they can’t take it when they leave. Eventually, you’ll be able to increase your rates because of the upgraded space. In addition, the commercial tenants may be more inclined to stay since the space has been optimized for their use.

5. Determine Scalability

Tenants often must consider whether they’ll renew their lease based on scalability potential. Their operations may have significantly expanded since they started out, meaning they need more room to grow. They might be looking for alternative real estate, or simply expansion within the same commercial property.

Consider working it into a renewal agreement if you have additional space for them. Having them in multiple properties or spaces within the same property can benefit you if they’ve been great tenants. You may have leverage during negotiations since keeping them in the same location is also advantageous for them. They won’t have to deal with moving, and consumers will likely stay loyal to a familiar site.

6. Understand Availability

The real estate market is one thing to consider during a commercial lease renewal. Beyond rate increases, you must factor in the availability of alternative tenants. For example, the pandemic significantly lowered office sector investments while increasing the value of logistics and industrial real estate. Does your property have other interested parties?

If not, you may be between commercial tenants for a while. Even though a vacancy is manageable, keeping a stream of revenue from your current ones may be ideal. Consider the market’s opportunities and the challenges of an empty space before your commercial lease renewal.

Make a Renewal Decision

Deciding whether or not to renew a commercial tenant’s lease depends on their history at the location and their intent moving forward. It also relies on their willingness to stay. You may need to make adjustments, such as switching to rent management software or offering an improvement allowance, to incentivize them. A new contract is an excellent opportunity for both parties to benefit, so you should take some time to review your options before deciding the path forward with your tenant. Having the data available to make this decision implies the process. This is where STRATAFOLIO supports commercial landlords.