How to renegotiate the terms of your tenancy

Optional extras to include in your lease 

If you’ve been lucky (or skilled?) enough to negotiate an option for a further tenancy into your commercial lease, then you might be forgiven for thinking this only entitles you to a lease on the same terms as your existing lease.

While, generally speaking, the further lease is on the same terms (mutatis mutandis – that’s Latin for I’m a smart lawyer-guy)… The option for a further lease could be your opportunity to renegotiate the terms of your tenancy with your landlord.

Now, fair warning, this is entirely dependent upon the respective bargaining power of the parties. If your landlord is in a position of strength (let’s say, for whatever reason, he doesn’t care whether you stay or go for the next three years) then the rest of this article is probably redundant. You’ll need to make a commercial decision as to whether you exercise your option to renew the lease for a further term.

If however, the landlord expresses a preference for you to renew the lease (they may not always tell you this but you can usually smell it on them), then the mere risk (let’s not use the word “threat”) that you won’t exercise the option may make them uncharacteristically reasonable in their negotiation position. 

What to think about when renegotiating your lease

If you find yourself in the unique position of strength, then you may consider the following points in your negotiation:

1) Remember to include a further option!

The last thing you want to do is cut yourself a “ripper” deal due to your newfound negotiation strength only to be royally screwed (to use technical language) when your further term eventually expires. 

Landlords can be spiteful creatures and, if they’re anything like their lawyers, they’re not likely to forget the time you showed them who’s boss. So why not build-in some negotiation strength for “round 2” by including a further option. 

2) Try for a rental reduction

This is everybody’s favourite tactic and it is often not well received. But if you can secure a reduction in the commencing rental (or at least no change) then you’re probably doing pretty well – UNLESS your lease contains a market review clause without a ratchet provision, in which case you might need to consider the market rental before proceeding. Don’t sign anything before you get a lawyer (me for example…) and we’ll get to the bottom of it.

3) Alternatively, try for rental concessions

If the landlord is unwilling to reduce the commencing rental (and there can be a number of reasons for this) they may still be willing to enter into an agreement to reduce or forego the rental payable during the first 6 (or even 12?) months of the tenancy.

Note that the landlord may want this arrangement documented separately (i.e. not in the lease document), but perhaps that’s best addressed in a separate article (I may yet write a book).

4) What about non-monetary/rental incentives?

If you can’t secure a cash saving, then perhaps you will have a little more success in securing an equally valuable contribution to your fitout or refurbishment of the premises. Landlords can be more inclined to contribute in this manner because, ultimately, this may increase the value of their asset (by improving it AND by not reducing the rental yield).

There can be tax consequences here. That is to say, if a landlord pays a cash amount towards fitout, and the tenant retains ownership of the fitout, the payment by the landlord will be treated as a deductible cash contribution for the landlord’s taxation purposes AND, while the amount received by the tenant is treated (and taxed) as income, the tenant may be able to claim depreciation and capital works deductions in respect of the fitout. It’s a rich tapestry.

5) Anything else I can help you with sir?

If you have found yourself in a position of strength then there may be other changes to the lease which you wish to negotiate. For instance, increased/varied signage, carpark allocations, capital works to the premises, etc.

Be creative… and remember the worst they can say is “no”.

When renegotiating your lease REMEMBER, you will likely have a “window” of time to negotiate. This window will eventually close (when the timeframe for exercising the option lapses) and with it goes your bargaining power. Time will be of the essence (I mean that in a non-legal sense but it’s probably both…).

Before you renew your lease, talk to MDL

If you need assistance or advice with respect to exercising your option or negotiating your lease renewal, call the experienced Business Law team at McCarthy Durie Lawyers today on 3370 5100 or fill out the contact form here.