How to Navigate Commercial Rent Increases in your Lease

Finding the perfect commercial space is crucial to your business’s success. However, when your lease is up for renewal, you may find yourself facing a rent increase and reviewing your rent escalation clause in your lease. This can be overwhelming, but with proper preparation and negotiation, you can navigate rent increases in your commercial lease.

What is a Commercial Rent Increase?

A commercial rent increase is when the landlord or property owner increases the rent price that the tenant is required to pay. There are several types of rent increases. These rent increases can be based on your escalation clause as well as market conditions. If inflation and demand is high, you may see overall rent growth in your area.

What is a Commercial Rent escalation clause?

An escalation clause in a commercial lease is a provision that allows the landlord to increase the rent over time. This clause typically specifies the method of calculating the rent increase, such as a fixed percentage, Consumer Price Index (CPI), or other predetermined factors. It’s important for tenants to understand the escalation clause and its implications when negotiating a lease agreement.

Types of Commercial Rent Increases

Annual rent increases: As the name suggests, this type of rent increase occurs every year, usually at a fixed rate agreed upon in the lease agreement.

Percentage rent increases: Percentage rent increases are based on a percentage of the tenant’s sales. This type of rent increase is common in retail leases, where the landlord may share in the tenant’s success by receiving a percentage of the tenant’s revenue.

Consumer Price Index (CPI) rent increases: CPI rent increases are based on the Consumer Price Index, a measure of inflation. The lease agreement will typically specify the CPI index used and the percentage increase based on that index.

Limits on Commercial Rent Increases: How Much Can a Landlord Raise Your Rent?

The permissible limits on commercial rent increases vary depending on local laws and regulations. It’s crucial for tenants to be aware of their rights and protections in their specific jurisdiction. In this section, you can provide general information about rent control laws, if applicable, and any restrictions on how much a landlord can increase the rent within a given period.

Rent Control Laws and Regulations

Rent control laws and regulations vary by jurisdiction and can have a significant impact on rent increases in commercial leases. In some areas, there may be specific provisions that limit the amount or frequency of rent increases.

Rent control policies aim to protect tenants from exorbitant rent hikes and provide stability in the rental market despite the current economic environment.

For example, cities like San Francisco and New York have well-known rent control laws that restrict landlords from increasing rents beyond certain limits. These laws often include provisions for allowable annual increases, vacancy control, and just-cause eviction protections.

However, it’s important to note that not all locations have rent control regulations, and those that do may have different rules and restrictions.

When navigating a rent increase, tenants should research and familiarize themselves with the rent control laws in their specific jurisdiction. Understanding these laws can help tenants assess whether their rent increase complies with legal requirements and provides grounds for negotiation or dispute resolution.

Preparing for Commercial Rent Increases

Review the lease agreement carefully

Make sure you understand the terms of your lease, including any rent increase clauses, lease renewal options, termination provisions, as well as any additional fees and expenses.

Commercial Rent increase clauses:

Look for any provisions or clauses that explicitly address rent increases. This should outline the circumstances, frequency, and methods by which rent increases may occur.

Termination provisions:

Familiarize yourself with the leases’ termination provisions. Understand the notice periods required for termination and any associated penalties or obligations.

Rights and responsibilities:

Pay attention to the rights and responsibilities outlined in the lease agreement. Identify the specific obligations of both the tenant and the landlord, such as maintenance responsibilities, repairs, and property improvements.

Create a budget that includes potential rent increases.

Create a budget that includes potential rent increases so that you can plan accordingly. Here’s how to create a budget that includes rent increases:

Assess your current financial situation. Review your revenue streams, operating expenses, and any existing financial commitments .
Understand your lease terms so you know how often the increase can occur, the method of calculation, and any other relevant provisions.
Estimate potential rent increase based on info gathered from the lease agreement and localized market metrics as well as control regulations. You can estimate the range of the possible increase.
Adjust revenue projections by taking into account the potential impact of a rent increase. Consider how this may affect your operating funds and ability to generate income.
Evaluate potential areas where you can reduce costs or optimize expenses to offset the impact of a rent increase. Review your operating expenses such as utilities, maintenance costs, supplies, and marketing. Explore cost-saving measures with suppliers, implement energy-efficient practices, or explore shared services with neighboring businesses.
Build a contingency fund for unexpected expenses such as rent increases. By building a contingency fund, you can create a financial safety net to handle unforeseen circumstances, maintain business continuity, and reduce business risk.
Continuously monitor and adjust. Regularly monitor your budget and financial performance to assess the accuracy of your projections and make necessary adjustments. Keep track of market trends, business performance, and any changes in your lease terms.

Negotiate & Know your Commercial Rent Terms

As they say, knowledge is power. Know your rights as a commercial tenant. And leverage that intel to negotiate lease terms that are fair and favorable to both parties.

Negotiate a longer lease term

If possible, try to negotiate a longer lease term to lock in the current rental rate for a longer period. Landlords often value stability and long-term tenancy, and a lengthier lease commitment may make them more open to negotiation.

Know the rent control laws and regulations

Know your tenant rights and protections

Tenants have specific rights and protections when it comes to rent increases, and it’s important to be aware of these entitlements. Tenant laws and regulations vary, so tenants should review the specific laws applicable to their jurisdiction. Common tenant rights related to rent increases include receiving proper notice of the increase, usually within a specified timeframe, and having the opportunity to negotiate or challenge the increase if deemed unfair. Some jurisdictions may require landlords to provide a valid reason for the increase or limit the percentage by which rents can be raised annually.

Tenants should also familiarize themselves with dispute resolution mechanisms available in their area, such as mediation or arbitration services, to address rent increase conflicts. Being aware of their rights and protections empowers tenants to advocate for themselves and seek a fair resolution.

Communicate with the landlord or property manager early on in the process

Express your concerns and ask for information about the reason for the rent increase, as well as any available options for negotiation.

Documenting Lease Terms and Rent Increases

It is crucial for tenants to maintain thorough documentation of all lease terms and any rent increase-related communications. This documentation serves as evidence in case of disputes or misunderstandings between the tenant and the landlord.

When entering into a lease agreement, tenants should ensure that all terms, including any provisions regarding rent increases, are clearly stated in the written lease document. Any subsequent amendments or modifications should also be documented in writing.

In addition, tenants should keep a record of all communications related to rent increases, such as notices received from the landlord, correspondence regarding negotiations, and any agreements reached. This documentation helps establish a timeline of events and ensures that both parties have a clear reference point in case of disagreements.

By maintaining organized and comprehensive records, tenants can protect their rights and make informed decisions during rent increase negotiations.

Tips to Negotiating Commercial Rent Increases

Research Comps

Negotiating a rent increase can be challenging, but it’s important to remember that it’s a negotiation, not a demand. Start by researching the current rental rates for similar commercial properties in the area. This will help you understand what a fair rent increase would be and provide you with data to support your negotiations.

Be clear about your needs and goals

You may be able to negotiate a lower rent increase if you agree to extend the lease term or if you offer to make improvements to the property that will benefit both parties.

Discuss additional lease concessions:

Apart from the rental rate, tenants can explore other concessions that may help offset the impact of a rent increase. These concessions may include requests for rent abatement during renovations, reduced parking fees, or improved maintenance services. Identifying mutually beneficial solutions can foster positive negotiations.

Highlight the value you bring

Emphasize the benefits you bring to the property and the local area. If you have a successful business or a solid track record, demonstrate how your presence contributes to the property’s overall value. Landlords may be more inclined to maintain a stable and reliable tenant rather than risk a vacancy.

Be willing to compromise:

It’s important to keep an open mind and be willing to compromise. If you and your landlord cannot agree on the terms of a rent increase, consider hiring a commercial real estate broker or attorney to assist with the negotiation process.

Seek professional representation:

Commercial real estate brokers and attorneys have experience negotiating lease agreements and can provide valuable insight into the negotiation process. They have in-depth knowledge of market trends, lease structures, and negotiation strategies. They can help tenants navigate the negotiation process, understand lease terms, and advocate for their interests effectively.

Alternatives to Rent Increases

If negotiating a rent increase is not an option, there are several alternatives to consider.

Review your current lease: Review your current lease and identify areas where you may be able to reduce costs. For example, you may be able to negotiate lower operating expenses or reduce the size of your leased space.
Negotiate additional concessions with your landlord: For example, you may be able to negotiate free rent, reduced parking fees, or other benefits that can help offset the cost of a rent increase.
Consider relocating to a new commercial space: If you’re unable to negotiate more favorable terms, you can consider relocating to a new commercial space. This may not be an ideal solution, but it can be a good option if you’re unable to negotiate a fair rent increase or if the cost of the rent increase is simply too high.

Commercial Real Estate Due Diligence

When navigating rent increases, it’s important to conduct due diligence on the commercial property to ensure that it is the right fit for your business. Due diligence is the process of evaluating a commercial property to ensure that it continues to meet your needs, allows you to evaluate current market conditions, identify any issues, and is a sound investment.

Furthermore, during the lease term, tenants may choose to conduct periodic reviews or assessments of their leased properties to identify any maintenance or repair needs, address compliance issues, or evaluate the property’s ongoing suitability for their business operations.

Legal Due Diligence

Legal due diligence involves reviewing the lease agreement, title history, zoning regulations, and any other legal documents related to the property. This will help you understand your rights and obligations as a tenant and ensure that the property is free from legal disputes or encumbrances.

Financial Due Diligence

Financial due diligence involves reviewing the financial records of the property, including income statements, balance sheets, and tax returns. This will help you understand the financial health of the property and whether it is a sound investment for your business.

Environmental Due Diligence

Environmental due diligence involves assessing the environmental risks associated with the property, including potential contamination or hazards. This will help you understand any potential liability associated with the property and ensure that it is a safe and healthy environment for your business.

Real Estate Property Inspection

Finally, a real estate property inspection involves physically inspecting the property to ensure that it meets your needs and is in good condition. This will help you identify any potential issues with the property, such as maintenance or repair needs.

In conclusion, navigating rent increases in your commercial lease requires careful preparation, negotiation, and understanding of your rights as a tenant. By reviewing the lease agreement, creating a budget that includes potential rent increases, and conducting proper due diligence, you can effectively manage rent increases and make informed decisions for your business.

Implement Lease Management Software

Implementing a commercial lease management software like Occupier can offer numerous benefits for commercial tenants. It streamlines and centralizes lease-related tasks, ensuring that critical dates, terms, and obligations are efficiently managed. This reduces the risk of missing important deadlines or overlooking key clauses, thus minimizing potential legal and financial disputes. With features like rent forecasting, tracking additional rents, and calculating percentage rent make it easy for commercial tenants to navigate commercial rent increases. Occupier is the only lease management software to power the entire lease lifecycle — site selection to critical date management to ASC 842 compliance.