Time to Renew Your Retail Lease?

Ways to Leverage Your Position Beyond a Reduced Rental Rate.

Given current economic conditions, there are many retailers looking to renegotiate their lease. Landlords know this and should be willing to work with you as a tenant. If you also happen to have an upcoming renewal option or if your current term expires within the next 24 months, you’ll have additional leverage. Here are three levers beyond a reduced rent rate, that will help you come out ahead:

1. Free Rent and Percentage Rent Adjustments.

You likely already had free rent in your initial lease. It’s important to negotiate for this again and landlords expect you to ask for it. If you need immediate relief, then it’s possible to ask for the free rent upfront (first few months of new term) in an effort to make up for losses due to the pandemic. Additional free rent can also be obtained if there are planned improvements (construction) to update the space. In other words, request additional free rent during the time your space is under renovation. Aside from free rent, you want to make sure your base rent is in line with market rates. If market rates warrant a base rent reduction, or if your business cannot meet its obligations with a reduction, it’s only reasonable to offer the landlord a higher percentage rent. This limits your immediate risk by lowering your fixed rent payments and allows the landlord to have significant upside in the future.

2. Tenant Improvement Allowance

Given the long-term of an initial lease (~10 years), landlords expect you to make upgrades to your space and therefore contribute capital dollars towards a renovation. This may be as big as a new bathroom or as small as some fresh paint and new fixtures. I believe there’s a huge opportunity in purchasing more modular fixtures that are timeless and can be reused later to save on future capex. It’s important to negotiate for items like fixtures and architecture or engineer fees to be included in the allowed expenses for the tenant allowance. Most landlords will try to exclude these items as they’re not permanent capital improvements of their property, but it’s worth raising especially when you consider current economic conditions and the fact that they do not want to lose tenants during this time.

3. Sales Termination Right

If you’re worried about future sales, then it’s important to give yourself an out if you’re not doing well. A sales termination right is the right to kick-out of your lease if sales are below a certain threshold. It may be tough to ask for a termination right if your new lease term is only 5 years, but I believe many landlords will be more understanding during this time. Having this will certainly make you feel more comfortable in renewing.