Who Really Holds The Marbles on Renewals?
What is the landlord's first line of defense in achieving both economic and business advantages over the tenant when it comes to the tenant's exercising their options to renew, extend, or expand?
Simply put—scare the broker. If that fails, put the tenant in the middle and see who breaks first.
Why is it important to be represented in negotiating options? In many cases, options are written in such vague language that you are almost starting from scratch when it comes time to actually exercise them. Take a moment and pull out your present lease. Now turn towards the back, somewhere around Section 51 or 52 where it says “Option to Renew.” Read it carefully and tell me what it says. Are there any loose ends?
Of course you know what “fair market value" is. You know what concessions are being given to other tenants. You know all the issues that need to be addressed during this option period that may not have been relevant when you first signed the lease five years ago. How about the expansion? What TI's can you expect? What is your rate for the new space? How does this affect your parking requirement?
Get the picture?
What's happening to the portion of the rent that is paid by the landlord to a broker as part of a “fair market deal”—that is, what’s happening to your money?
You have three choices:
Have the commission fee go to the landlord.
Have the commission fee go to the landlord's broker.
Have the commission fee go to your broker.
Let's take a closer look. If you move out, the landlord will have to pay a fee to the broker representing the new tenant and pay his own listing broker. If you stay, where does that money go?
Is the landlord going to give you a lower rate? If he does tell you that he would give you a lower rate if he didn't have to pay a commission (and assuming you have a contract with your broker (remember one of our earlier lessons?)), he may be interfering in your contractual agreement (again, any of you lawyers out there are welcome to jump in any time). The same may be said if the landlord tells you that you can be represented as long as you pay the broker’s fee. Great, let's put the tenant in the middle—does the tenant fight for his rights at the risk of upsetting the landlord, or is it better for the tenant to step back and let the broker and landlord fight things out?
A question you want to ask yourself—if the landlord does pay the fee, is my rent really “market?" While the landlord promised a $.03 or $.04 per month lower rate by cutting out the broker, is that a real cut in the base rent, or is just what the landlord told you it was? Do you know what “market” really is? The answer is real simple—the landlord now has the negotiation advantage, the financial advantage, and the emotional advantage. Get the picture?
In California, there is case law that dealing with these scenarios. Consult a good real estate attorney who specializes in leasing. We are not attorneys and cannot speak to legal precedent, but we know it exists. How's that for double speak indemnification?