Friday, February 27, 2015

I'll Just Wait to Renew my Commercial Real Estate Lease...No BIG Deal...or is it?

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You are sitting in front of your computer and you get a note from the owner of your property. Your commercial real estate lease expires within the year and you assume that your landlord is writing to assess your interest in re-upping for another three to five years...that is what you assume.

In reality, your owner is writing to let you know that he sold your building, and that the folks that bought it are planning to move in at the expiration of your lease! Now you are faced with a costly relocation and the loss of a substantial amount of improvements that you have made to his building.

Just how did this happen, why would an owner do this, and what should you do in your next lease or lease renewal to prevent this from occurring again?

How this can happen. On three separate occasions, recently, my clients have been on the receiving end of the news above. It is devastating! Fortunately, in all three cases, enough time remained on the lease that we were able to maneuver and find new quarters or negotiate a short term renewal. But what if the opposite was true? The business could have been adversely affected...or worse fatally affected. Can an owner really do this to you...his faithful tenant? An owner can absolutely do this to you. After all, you, as the tenant, can play cagey up until your lease expires, move out and leave the owner high and dry. The owner can do the same to you with the only caveat being the new owner buys the building subject to your lease...in other words, the new owner can't simply cancel your lease , but can opt not to renew your lease.

Why an owner would do this. Simple. The owner doesn't want to own the building anymore.  Frequently, the owner needs to monetize the equity contained in the building for an estate tax obligation, to retire another debt, to satisfy the maturation of a loan on the building, or because he can't refinance an existing loan on the building. An owner can now recover his equity from a sale even if he overpaid for the building in 2006-2008 as values have recovered nicely from the doldrums of 2009, 10, and 11.

What you should do to prevent this from occurring. The first thing to do is realize that you are the best buyer for his building because you occupy the real estate and have paid rent on the premises for a number of years. Assuming you want to buy the building and can finance the purchase or write a check for the amount of the purchase, you are a seller's dream! Make sure you constantly remind the owner of your desire to buy the building if she ever wants to sell the building. Send the owner a letter or an email once a year to memorialize your interest.

Secondly, don't wait too long to engage your owner in a lease renewal conversation. If you want to stay and renew your lease, a year in advance of an expiration is not too soon. If your owner is reluctant to discuss an early renewal, your terror alert should read Decon 4...something is up!

The last thing, I would recommend is to consider your renewal rights and request a right of first refusal, the right of first offer, or an option to purchase the building when you negotiate a new lease or a lease renewal extension. At a minimum, you should have a market rate option to extend the lease for a term commensurate with the term of your original lease.