Imagine you’re looking at a new commercial property. You like this location, you like the building, and you would very much like to keep your operations here for years to come.
You’re ready to sign on to commit to this commercial space and feel good that you have a fair market renewal clause in your lease.
However, it’s important to know that this fair market renewal rate is not always fair. When it’s time to renew in a few years, you may have to pay far more than you think.
The good news is you can avoid any renewal-related surprises or hidden fees down the line by clearly defining your terms today. Here are a few things to look out for.
The Rate is Based on Renewed Leases. Not All Leases
Never assume that your landlord’s assessment of your fair market rent rate will include all leases. It may be based on renewed lease rates, and unfortunately, renewed leases are almost always higher than new leases.
Very few businesses want to go through the process of packing up and moving their entire staff and operation to a new office or location. There are dozens of costs and headaches that go with this move, so they may be willing to pay a little bit more to stay put.
Also, their initial rate may have been lowered because the space needed work or renovation to be suitable, and some arrangement may have been made with lower rent or other incentives.
Your fair market rate may be based on those higher renewal rates, without factoring in the lower first-time rates.
The Rate May Not Include Comparable Buildings
Does your space face another office right across the street? You may look into their windows and notice that their office is roughly the same size and layout. However, the rent they’re paying has no impact on what your fair market value will be.
Your landlord may be a more experienced and savvy negotiator than whoever represents the building across the street. If this is the case, your comparables within the same building could be much higher across the board. This may leave you paying considerably more than your neighbors across the street, even if it’s pretty much the same space.
The Right to Arbitrate is Not Automatic
It’s a very common myth that the right to arbitrate a fair market case is automatically guaranteed.
Unless the right to arbitrate is explicitly stated in the terms of your lease, you do not have it. This means, if the landlord would rather give your space to someone else, they could offer you a clearly prohibitively high renewal rate so you will go elsewhere.
In many cases, landlords and building owners certainly have the ability to slant fair market terms in their favor. Always pay special attention to the exact terms of how fair market renewal is defined in your lease. If you’re not comfortable in this area, be sure to work with a commercial lease expert who can review it for you.
If you’re not diligent in defining this, you’re vulnerable to whatever your building owner/ manager thinks “fair” means. Or, in many cases, you’re vulnerable to whatever they want you to think fair means.