How To Ask If A Tenant Wants To Renew Their Lease

August 13, 2012 

How to ask if a tenant wants to renew their San Diego commercial real estate leasing can be a little tricky, so it’s important to think through a few things first. 

My personal opinion is that when you’re ready to ask if a tenant wants to renew their lease it’s best to aim for a win-win situation between the landlord and the tenant. 

Here’s why: 

If you ask a tenant to renew their lease and the terms are too one-sided in favor of the landlord, you’ll probably have problems enforcing the terms and conditions of the lease down the road. 

Maybe they tenant will slow pay or stop paying or maybe they’ll want to renegotiate. Either way you may find yourself going back to the drawing board a lot sooner than you expected. 

On the flip side if you ask if a tenant wants to renew their San Diego commercial real estate leasing and you agree to terms that are to favorable to the tenant, you could end up with a below market rent or a tenant that keeps coming back to you for more, because you’ll have given them the impression that you need them more than they need you. 

Before You Ask If A Tenant Wants To Renew Their Lease

If you haven’t signed a lease with a tenant yet, do a thorough read through of your lease to make sure that there is a lease clause that covers what happens if the event that the lease expires and the tenant is still in your space. 

This is also called a ‘holdover clause’, and it might seem like putting the cart before the horse, but it’s not. 

A couple of common lease clauses are: 

1.  The monthly rent increases – often by 200% – if the tenant stays but does not renew their lease. 

2.  The lease automatically renews for a fixed period of time and at a fixed rate that’s defined in the lease. 

In a property that I manage I recently had a lease come up for renewal and the negotiations dragged on longer than they should have, in part because the tenant assumed that they held the upper hand. 

The short story is that the lease was successfully renewed, but it could easily have gone the wrong way for us. 

In the lease that the property owner inherited when it bought the building, there was no holdover penalty if the tenant stayed in the space but didn’t renew its lease. In other words, they could have stayed without a lease and continued to pay the same monthly rent that they had been paying, with no penalty. 

How To Ask If A Tenant Wants To Renew Their Lease

Here are a few points in commercial real estate in San Diego that have worked for me when it’s time to ask if a tenant wants to renew their lease: 

Know what the tenant’s alternatives are before you ask them if they want to renew their lease.

If they’re renting generic space from you and there is a lot of similar vacant space on the market it might be easy for the tenant to say no to your renewal offer and simply move somewhere else. 

Speaking of moving somewhere else, in many markets tenants are now able to purchase a property of their own instead of leasing, with little or no change in their monthly expenses. 

Consider the timing of when to ask if a tenant wants to renew their lease. 

Don’t assume that the tenant always knows that their lease is going to expire. 

So, if you ask the tenant if they want to renew their lease too far before the expiration date you’ll give them the chance to look for alternative space. How far in advance you approach your tenant for a lease renewal is going to depend on the type of business they’re in, how unique their tenant improvements are, and what their alternative options are. 

Aim for a win-win situation. 

In the long run you’ll come out ahead if you strive for a win-win situation when you ask a tenant to renew their lease. 

You’ll increase your chances of having a tenant in San Diego commercial real estate leasing that will pay its rent on time, you’ll have a lease that’s much more enforceable, and you won’t have to worry about the tenant ‘sabotaging’ your property – by wasting water or electricity or by bad-mouthing your project to other prospective tenants. 

Source: Basic Property Management Blog

DISCLAIMER: This blog has been curated from an alternate source and is designed for informational purposes to highlight the commercial real estate market. It solely represents the opinion of the specific blogger and does not necessarily represent the opinion of Pacific Coast Commercial.