LPC advisors are often asked, "When is the best time to start negotiating a new lease?". Our answer is, "The moment you sign your current lease agreement".

While this exchange has an amusing element to it, it communicates an essential truth for commercial tenants - the more time a tenant has before they make a leasing commitment, the greater the opportunity to build leverage, and the less time a commercial tenant has before they make a leasing commitment, the less time there is to create leverage. In our experience, not ensuring enough time to build leverage is the most common tenant error when it comes to lease negotiations, and this omission is tied to leasing outcomes that advantage the landlord and disadvantage the tenant. 

In this article, our team will provide anecdotes to illustrate the importance of time and leverage and insights for ensuring enough time for leverage and how best to direct the leverage.

Lost time equals lost leverage equals increased business risk

Not a day passes without one of our advisors coming across a situation where an occupier has had to accept an unfavourable lease outcome or forfeit an opportunity for an improved outcome because they didn't provide sufficient time to build leverage. Regardless of the sector (office, retail, industrial, NFP, government) and whether the occupier is large or an SME, the outcome is always negative for the occupier when time is short, and they have lost leverage in accommodation negotiations.

Just this week, an SME asked our team to assist with a last-minute lease negotiation related to a lease expiry. With six weeks to go on the lease, the landlord provided an amendment for execution by the tenant, with significant changes to the existing lease terms, all of which increased the tenant's business risk. As the location was vital for business continuity, and as the time was too short to establish alternatives and create leverage, the SME owner had limited negotiating power and was, in effect, forced to accept the introduction of tenant-unfriendly provisions that included a demolition provision, onerous annual rent review terms, and an option-to-renew that had a market rent review clause with a ratchet and no right to incentives. Furthermore, the limited time available for negotiation resulted in the lessee forfeiting the potential for significant incentives, for removal of personal guarantors, and for increasing the landlord obligations and guarantees, all of which reduce business risk and all of which would have been achievable if time had been available to build leverage. 

Ensuring enough time to build leverage

There are many reasons for not ensuring sufficient time to build leverage. They include the human tendency to leave for tomorrow what we should do today, an incomplete understanding of the impact of lost leverage on lease arrangements and business risk, an inadequate lease management regime, over-reliance on an option-to-renew provision, and giving insufficient attention to ensuring your accommodation strategy is optimally aligned with the business strategy. Ensuring sufficient time to build leverage requires a lease management regime that counters the above-stated causes of lost time and leverage. A clearly articulated accommodation strategy, in combination with management systems, ensures attention is given to lease matters at the right time, by the right people, and with the right information to achieve the right accommodation outcomes.

Using leverage to reduce business risk

It is important to note that while time enables leverage, yu must use time well to build leverage. The key to using time well is to have a clear picture of the intended end in mind, and this means answering the question as to what accommodation (location(s), premises, commercial terms) best support the business objectives. The end in mind must be well-informed, for you will need to revisit any ambiguity, which will always result in lost time and leverage. At LPC, we apply a well-developed framework that facilitates the development of an appropriate accommodation strategy and a disciplined 4-phase negotiation process that ensures we optimise time and maximise leverage. 

Final comment

We end where we started - LPC advisors are often asked, "When is the best time to start negotiating a new lease?". Our answer is, "The moment you sign your current lease agreement".