Do any companies really just exercise lease renewal options any more? Don’t most companies negotiate to modify the terms contained in their lease renewal options? Doesn’t that mean that lease renewals aren’t really ‘renewals’ but, instead are new deals?
In a recent blog post I asked the question “Do Tenants Really Need Brokers When Negotiating Lease Renewals?”. When we posted that question in a Corporate Real Estate Group on LinkedIn, a discussion began where numerous brokers, landlords, attorneys, and tenants from around the world added their thoughts. One particular real estate professional very clearly exclaimed that there is no longer any such thing as a renewal. That made a lot of sense to me because for many years, I’ve viewed renewal options as nothing more than providing tenants with an extra element of future control over their premises. In almost every transaction in which I’ve been involved where a tenant contemplated remaining in its premises beyond the initial expiration date, instead of exercising renewal options, those companies negotiated new terms. So, those transactions weren’t “renewals” at all, but were actually new deals with new terms.
What is a renewal? A renewal is when the previous terms of a lease are… renewed…when a tenant and landlord apply the same terms of a previous lease to a new term. Except, for years, in almost every renewal clause certain terms, like rent, almost always change. So, since rents change, then renewals aren’t REALLY renewals anyway, right? They’re renewals with changes…new deals!
Even the kind of renewal where only the rent changes rarely occurs anymore. In fact, I cannot remember when any of my clients simply sent a letter to their landlord “renewing” their lease.
Let’s face it…companies that occupy real estate change. Their employees change in type, function, experience, skill, quantity. The way they conduct business, the type of businesses they’re in, and so much more, often changes over the 5 or 10 years that they occupy space under a typical lease. So, it makes sense that their real estate needs will change, too. That’s why few companies just exercise renewal options anymore.
Prudence demands that companies examine their operational and financial needs before making major decisions like those about real estate. Moreover, transparency and disclosure expectations of stakeholders, Boards, and senior management force companies to consider competitive alternatives, examine market availabilities, and secure terms that best suit their businesses in the present day. Few executives would describe good business practice as automatically entering into real estate transactions on terms created five or ten years earlier, instead of based on their current and anticipated future requirements.
So, are renewal transactions really “renewals” anymore? Not really!
Please tell me your thoughts on this.
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Real Estate Strategies Corporation is a respected corporate advisory and transaction services firm that provides thought-leadership, decision-making, planning, project management, and transaction execution services to finance and senior executives at management team-led public, private, and portfolio companies, and not-for-profit organizations. Under the leadership of its award-winning CEO, Andrew Zezas, RealStrat’s clients engage the firm when acquiring, disposing of, renegotiating, or enhancing occupied leased or owned real estate in New Jersey, Pennsylvania, New York, Connecticut, and throughout North America. By creating and executing Business DRIVEN Real Estate Solutions and identifying hidden Opportunities, RealStrat drives greater operational and financial performance in support of its clients’ stakeholder objectives, M&A requirements, and exit strategies.
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