Apr 072013
 

“Renegotiating a lease is easy”. The country is in recession, office vacancy is rising and many landlords and developers of shiny new buildings delivered with much pomp somewhere in the late/middle noughties are getting to breaking point.

So, all a company director needs to do is get his assistant, secretary or head of maintenance to email or call the landlord and suggest the rent be reduced by a decent sounding percentage. The landlord will inevitably say yes, and the following month’s P&L will show that the cost cutting drive is working.

But are we really getting the right deal? What if the landlord says no? (stubborn short sighted lessors who can’t bring themselves to accept reality abound even today in the Spanish commercial property market).

Is there a plan B? There’s little point in threatening to move if the costs involved far outweigh those of staying and stomaching the passing rent. In cases where there are still 18 months or more left on the lease (Spanish leases are generally 3 to 5 years maximum mandatory periods), the cost of leaving is high (even if the new landlord is offering an ample rent free period). If you add to this the moving and fit out costs, the alternative could well be so prohibitive as to force a humiliating retreat.

Consider therefore the following:

Planning

  • Location: Where do we want to be? Do we really need to stay in the town centre or can we move to a suburban office location with better buildings and an opportunity to dramatically reduce the rental obligation, rather than shave a nominal percentage?
  • Space: What is our real space requirement? Many small and medium sized companies occupy space because it’s there and not having undertaken a detailed space planning study. Modern office floors also tend to be more efficient, meaning that part of the saving we could achieve in a new building is via space reduction.
  • Future growth projections: It is true that most companies are not yet thinking about expansion of staff and consequent space requirements, but at some point in the future this will be an issue. One question to ask is can we get flexibility in a new office building? Landlords of high vacancy buildings are often more prepared to accept flexible space occupation, or reservations of contiguous modules or floors for specified periods of time.
  • What are the options in our current location? If the existing location is the only one that works, then we need to be very clear as to the availability, rents and other concessions in the area. If there is nothing suitable, this will inevitably condition the approach we make to the current landlord.

Strategy

Once we are clear of the precise requirements and alternatives available to us, it is wise to develop a strategy for how we go about approaching the Landlord.

Do we call the Landlord first and give them the chance to negotiate terms?  This may be recommendable if there is a good historical relationship. However, in other cases, it may be more advisable to start making some noise so that the landlord is aware of the risk of losing a tenant before the call is made.

If a Landlord hears through a third party that his tenant is looking at alternative properties, it is more likely that they will make the first move. You are in a stronger position if the renegotiation is proposed first by the Landlord.

Do we do it ourselves or do we send a messenger? I refer for example to a company or professional who will represent you in the negotiations with the Landlord and in the search for alternative premises. As a professional in the sector, I would always advise this option, but the arguments for and against are for another discussion.

Contract Detail

It’s not necessarily just the short term rent that we should be focusing on. A renegotiation is an opportunity to review the overall conditions of a lease that was perhaps signed by a predecessor or agreed under very different market circumstances, years previous.

Clauses such as mandatory periods, renewals, rent reviews, guarantees etc., stepped rents and even a new rent free period may all be worth revisiting.

Like in any negotiation, it’s not about winning every clause. We need to put ourselves in the position of the Landlord. What matters to them? In many cases the answer will be “commitment”, the longer we can commit to a revised lease, the better deal we are likely to get.

The likelihood that the office letting market is going to improve significantly in the next two to three years is low. And for once it appears that players on all sides of the table are tending to agree.

 

These are just some initial thoughts when, as an occupier, you are considering trying to get a rent reduction. Don’t wait until the lease is about to expire, plan with good time and make sure you have a clear alternative that you are prepared to carry through if you can’t reach agreement.

8th April 2013