Commercial lease extension

by cac3a. Posted on Sep 12, 2020    1    1

What is a typical procedure for extension of commercial leases. We used to have a static rent for some years and them after that it was going up every year. Now when if comes to extension the proposal we got is with annual increase each year for next several years. Is that all typically negotiable and what is average norm commercial lease increase or annual basis?


tomhalejr 1

Commercial leases tend to be for a longer period than residential leases... It goes both ways. The property owner is projecting out 10 years, and wants that value now. The lessee is looking to secure a set cost (as you are) that is sustainable over the next couple/few years. So the "compromise" to secure, and limit liability, for both parties tends to be in the say 4-6 year range...

An ideal outcome to any negotiation is one which both parties can benefit, if both parties work together to achieve greater success.

In a build to suit type situation, you would be looking for a longer lease duration, at a lower rate, because you are putting a lot into the front end development of the property, that adds value to infrastructure in the long run. (You would also want a sublet option, just in case the business fails, or expands beyond that location, so you don't get stuck with the lease/penalties.)

If you are in more of a "status quo" type situation, where there is no investment outside of necessary maintenance/repairs - Then you are just looking for a set rate over the next couple/few years, and hopefully a mutually beneficial early out option. (You bring me someone else in who's willing to negotiate a new lease at a higher rate, with their down, and I'll let you out early with no penalty.)

It all depends on the market, but it sounds like the market is exponentially increasing in value. So which extreme would you prefer - Signing a longer duration lease for a set rate, bit greater liability, or a shorter duration lease (leases) with a more variable rate, but potentially more flexibility?