by Michael J. McKitrick
Fall is a good time to review business operations and leases for the upcoming year.
This is especially true for businesses whose success depends on their location. Think restaurants, entertainment venues, retail, etc. Many leases have renewal options that must be exercised months prior to the end date. Not exercising your lease renewal within the time allowed and, in the manner specified, can cost your right to renew.
If you want to renew, but want different rent or terms, you need to approach your landlord well ahead of the renewal date to discuss renegotiation. Example: The expiration date is December 31 and renewal requires written notice to the landlord six months prior (June 30), then you should approach your landlord in January of that year for renegotiation. This will give you time to renew if renegotiation fails.
Renewal options almost always provide for an increase in rent. Some leases will specify the exact new rent. Others will provide for an increase based on the increase in cost of living under a CPI index. Some leases simply provide for an increase in rent based on market rent. If this is the case, you get a proposed rent increase from the landlord. If you disagree on the amount, depending on the terms of the lease, you can submit to a form of arbitration or mediation to determine what the market rate is. In some cases, the lease terms will simply state that if you disagree with the market rent, you forgo the opportunity to renew.
With the surge in inflation post pandemic, these rent increase provisions can lead to exorbitant rent for the renewal. Should you reject the rent increase, you should seek alternative options well in advance of the end date of your lease. I suggest at least one year in advance of the end date. In this case, you should consider engaging a commercial real estate broker and attorney that is experienced in real estate. Brokers know the market and the attorney will be able to review the proposed lease to clarify and be certain that the terms are protective of your interests. Lease terms are very complicated, and one word can make a major difference. Moreover, leases are usually prepared by landlords and their attorneys, and the terms are almost universally favorable to landlords. You need experienced professionals to even the odds and protect your interests.
As you can see, the complexities of leases are apparent and daunting. This important asset of your business must be carefully monitored and preserved so that your business success is not derailed by loss of facilities or inappropriate or excessive rent and other lease terms.
Have you reviewed your lease recently?
Michael J. McKitrick serves large and small businesses as outsourced general counsel, providing advice and assistance as legal issues arise. He guides in structuring and negotiating business transactions, financial transactions and loan documentation, risk analysis and prevention, and regulatory issues. Mike can be reached at 314.889.7122 mmckitrick@dmfirm.com