Commercial Lease Renewals: Should I Stay or Should I Go?

Commercial lease renewals are, in many respects, more complicated and present more legal and business issues than signing the lease originally. If you did not have competent and experienced legal counsel review and provide advice on the lease at the start, it is important to have a good San Diego corporate lawyer look at the lease now, at the time of renewal. Here are some thoughts.

Renewing San Diego Commercial Leases: Location, Location, Location

Whether to renew your commercial lease is almost entirely a function of whether you need to stay in THAT location and cost factors.

Concerning the first, it is said that in real estate the three most important factors are location, location, and location. But, truthfully, that is not always the case — maybe for residential and retail, but no so much with manufacturing and warehousing. Thus, with respect to renewing your lease, the first question is whether you WANT to stay in that location or whether you NEED to stay or whether it does not really matter. Maybe you are a retail store heavily reliant on foot traffic. So, your thought is that you NEED to stay. But, on the other hand, there ARE many locations with heavy foot traffic. Maybe you are a retail business and your customers “know where you are.” Again, you may feel that you NEED to stay. But, even here, not necessarily. If you move across the street — literally — that will not likely affect your customers ability to “know where you are.”

Renewing San Diego Commercial Leases: Cost Factors

The main problem with most commercial leases is the automatic rent escalator clause. So, maybe your base rent was $3,000 a month with an automatic 10% per year escalator compounded. Over five years your base rent has done this:

Year 1 — $3,000

Year 2 — $3,300

Year 3 — $3,630

Year 4 — $3,993

Year 5 — $4,392

After five years, if average market rents in your area have not increased at 10% per annum, then you are over-paying. With a lease renewal, you are likely locked into the same escalator clause.

Another common problem is the common area maintenance (“CAM”) fees that are charged. Maybe five years ago the CAM charges were $300 a month, but now the landlord is into fancy landscaping and the CAM is $700 a month. There is no guarantee that the CAM will not go up and up.

The other main cost factor is the cost of actually, physically moving (and incidentals like changing the company stationary and legal address). Moving can end up costing thousands, so this is not an insignificant issue.

In the final analysis, whether to stay or whether to go is — or should be — largely a cost decision. Does the company save more money by moving or by staying (taking into account the new base rent, CAM, cost of moving, potential lost sales, and other revenue/expense factors)? In our view, it is always wise to at least test the rental market even if you are inclined to renew. At least you will know your options and, if you decide to stay, you will know how much you are paying beyond the average rents/CAM for your area (if any).

Renewing San Diego Commercial Leases: Timing and Proper Notice Matter

As your renewal date approaches, it is essential to read your lease and consult with legal counsel. Many commercial leases have STRICT rules with respect to renewal. Pay close attention to dates. Many leases require notice of non-renewal many months in advance; or, conversely, notice of the tenant’s exercise of the renewal option. So, if you start looking around for other rental space a month before your lease ends, likely you are either locked in already to renewal or maybe you have failed to exercise any option for renewal. The lease probably also has strict rules on the METHOD of notice. So, if you need to send a certified letter, then make sure you send your renewal or notice of non-renewal via certified letter. An email will often not cut it.

Renewing San Diego Commercial Leases: Negotiations are Advisable

One final note: As you explore your renewal/non-renewal options, do not forget to open negotiations with your current landlord. Maybe your trusted corporate lawyer can “reset” the base rent or negotiate a cap on CAM or “fix” other “problems” with your current lease. Maybe not, but negotiations are always worth a try.

Contact San Diego Corporate Law

For more information, contact experienced business attorney Michael Leonard, Esq. of San Diego Corporate Law. Commercial leases are complex and complicated and you need good legal counsel as you weigh your renewal options. Contact Mr. Leonard via email or by calling (858) 483-9200.

You Might Also Like:

Essentials For a San Diego Retail Lease

3 Overlooked Items In Commercial Leases

Consequences of Vacating My San Diego Commercial Space Early

Commercial Leases 101

Buying or Selling a San Diego Business: Dealing With the Commercial Lease