Successfully Negotiate a Mid-Term Rent Reduction in Your Lease
By Dale Willerton
We frequently meet a number of struggling chiropractors leasing commercial space. These chiropractic tenants desperately need a rent reduction ... right now. Whether the practice in question is small or large, business expenses are continually increasing and the high cost of leasing space is closing in on tenants. This can be due to any number of extenuating circumstances which you may have no control over (Obama healthcare as it relates to insurance coverage, for example). Your monthly rental payment to the landlord is one of your biggest monthly expenses. Therefore, reducing this monthly lease payment is imperative for practices like yours to stay viable.
If your chiropractic tenancy was at the end of its lease term there would be hope for a rent reduction on the lease renewal. Unfortunately, many chiropractic tenants find themselves in trouble somewhere mid-term into a five- or 10-year lease agreement (just recently, one entrepreneur admitted to us that he was struggling in year one of a ten-year lease term for a business he had recently opened).
Landlords want to avoid taking the space back. Replacing a tenant can be very time-consuming and expensive for a landlord. There are real estate commissions to pay, demolition of the existing premises to occur, months of lost revenue while the space sits vacant and so on. In addition, a new tenant moving into the space will probably get a tenant allowance and free rent to boot. It could be quite a few financial steps backwards for a landlord to replace your business tenancy, if they can at all.
Landlords always want to avoid adding to other existing or pending vacancies. If the landlord already has other vacant units within the same property, odds are greater they won't want another vacancy. Even if the office building appears to be fully-occupied by other tenants, many of your neighbours may be behind in their rent or planning to close out entirely sooner than you might think. Several existing tenants may not be planning to renew their leases so the landlord knows that more space will be coming available in that property soon. These make for all the more good reasons for your landlord to keep your tenancy, even at a lower rental rate.
Landlords always need to keep an eye on downward shifts in market rents. If market rents have reduced and the landlord is leasing space to new tenants at a lower rental rate than you are currently paying, then replacing you with another tenant is less desirable. Not only have you proven yourself as a more established tenant, the new tenant would be paying the lower rate (new market rental rate), making the landlord ultimately no better off.
If other practices in your industry are closing out in your area, then the landlord will be more motivated to keep you open, even at a lower rental rate. When any tenant closes out, the landlord (or the landlord's agent) tends to look for a similar use replacement tenant (i.e. another chiropractor). If no other same-use tenants want to take over your location, the landlord is better off keeping you open.
Whenever I help negotiates a rent break/midterm rent reduction for a chiropractic tenant, I follow a similar process and incorporate these tried and true tips. I'm always prepared to ask, ask and ask again. I put my request to the landlord or property manager both in writing and verbally. I do my homework by determining if market rents have declined, and find out what other tenants are doing.
Remember that landlords don't lower rents for the sake of the tenant; landlords lower rents to help themselves retain a rent-paying tenant because receiving 70 percent of the rent is better than receiving nothing at all – especially if there are vacant units in the property.
It's important to differentiate between a midterm rent reduction that includes an abatement (forgiveness of future rent or rent arrears) and rent relief, which gives the tenant a window of time where they pay less or no rent; however, the landlord simply tacks the unpaid rent onto the end of the lease term. In some cases, the tenancy cannot survive, and an early termination of the lease agreement needs to be negotiated with the landlord. Surrendering the space to the landlord is actually a reasonable and feasible alternative for both parties. Unless you are suing your landlord, it's best to leave your lawyer out of midterm rent reduction negotiations or lease terminations because this is not a legal exercise but a true negotiation. Landlords need to be shown that keeping the tenant alive paying a lower rent or freeing up the space for another tenant is in the landlord's best interest, not just the tenant's best interest. If a landlord has to choose between seeing your practice close down, or giving you a rent break it might actually be easier and cheaper for them to reduce your rent, right now, mid-term.
One struggling New York business-owner once told us that she discovered that 30% of her co-tenants have been paying little or no rent for the past few months. How could this be true and how could she also pay less rent was what she wanted to know. In commercial real estate it's every tenant for themselves. No two landlords are the same, but they all want and need cash flow from rent-paying tenants. Chances are you won't be the first (or last) tenant to approach the landlord for a rent break – so why not do it now?
At the end of the day, if a landlord has to choose between seeing your practice close down, or giving you a rent break it might actually be easier, cheaper and more realistic for them to reduce your rent, right now, mid-term.
Dale Willerton, The Lease Coach, is Commercial Lease Consultant who works exclusively for tenants. Dale is a professional speaker and co-author of Negotiating Commercial Leases & Renewals For Dummies (Wiley, 2013). Got a leasing question? Need help with your new lease or renewal? Call (800) 738-9202 or visit www.TheLeaseCoach.com. For a copy of our free CD, "Leasing Do's & Don'ts for Chiropractic Tenants," e-mail