Lease renegotiations can be a “win-win” solution for both parties. These negotiations can also fail miserably.  The interesting aspect of lease negotiations is that typically they are non-binding so either party can walk away at almost any time during the negotiations.  Sometimes lease renegotiation transactions don’t always work.  In fact, sometimes the strategy can be seriously detrimental to the landlord and /or you.  It is far easier for a landlord to say “No!” when approached about renegotiating a tenant’s lease.

Here are some of the reasons behind the “No”:

  1. Tenants or brokers who take an overly aggressive approach to renegotiating the lease.  Sometimes you can ask for too much.  I always believe in asking, you might be pleasantly surprised, but you also need to know when to back down.
  2. Landlords or tenants who conduct incomplete due diligence on their transactional opponent.  It’s important to have current market knowledge and use that as one of your weapons in your negotiating arsenal.
  3. Poor communications on the part of landlords, tenants, or their brokers.  I could write a book on that one.
  4. Landlords, tenants, or brokers who don’t understand how current market conditions and possible future market trends may impact their transactional opponent or how it might impact the landlord / tenant relationship, if a lease is renegotiated or if it is not .  That is why I strive to help my clients to make “informed” decisions.  You need to know the facts before plunging into a significant financial decision.
  5. Landlords who incorrectly assume that they have such strong relationships with their tenants that for some magical reason those tenants will never vacate their building, or that the tenant is captive and has no viable alternatives available to it.
  6. Landlords who do not expect to retain ownership of their buildings over the long term, either because they plan to sell them or fear they may lose the buildings through foreclosure or some other legal or government action. Therefore, despite the possibility of improving the value of a property as a result of a renegotiated and extended lease, such a landlord would likely see no value in this type of transaction. This is especially likely given the requisite capital and the often cash flow reduction associated with a lease renegotiation.
  7. Landlords whose buildings are so close to the edge that any renegotiation that produces lower cash flow in the short term, irrespective of the potential long term benefits, would push them over that edge and into the abyss.
  8. Landlords who may be in default of their debt covenants or whose relationships with their lenders are so strained that they have difficulty securing approvals.  This may include Landlords or lenders, where the building may already be in the bankruptcy process that may be legally unable to modify current lease contracts. I encourage my clients to avoid these situations.
  9. Landlord’s whose primary business may be something other than real estate and may cause too much distraction for them to be responsive to tenants’ request.
  10. Landlords that may have entered into contracts of sale for their buildings or they are actively engaged in refinancing their buildings and prefer to wait until that transaction is complete so they cannot or will not modify existing leases.  I have been in situations under this scenario and it is a real deal-killer.
  11. Tenants who may be viewed by the landlord or lender as being unstable, risky, or unworthy from the perspective of their finances, credit, reputation, or otherwise.  I have represented some tenants that required a compelling story to explain their situation to the landlord, but the tenant needs to be reasonable as well.
  12. Tenants who may be too small to have a positive impact on the building, its value, or the landlord.  This drives big name tenants occupying small spaces crazy.
  13. Tenants whose space may be desired by another tenant.
  14. Tenants in a building where the landlord may prefer to empty it and demolish it or convert it to some alternative use.
  15. Tenants that offer too short an extension term to create any real value for the landlord or they demand too many concessions to result in an economically viable transaction for the landlord.

So, even during this downturn when tenants have the upper hand, lease renegotiations do not always make sense.  Landlords, lenders, and tenants, each have good reasons to say “No!” at one time or another.  Let me help you create a YES solution for your landlord.

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Filed under: September 2010

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