Commercial Lease Renewal Option - Commissions - who pays?
Investor · Camp Verde, AZ · Member since 2016 · 31 posts · 2 votes
We have an office building with a great long term tenant, that is in a below market rates, and we're good with it because they are stable and NNN. Their lease is up for renewal, and contains one Option to renew, which they've notified us they want to exercise. We sent over a simple form to execute the option, but tenant says they work with a broker on their real estate leases. That broker sends over a lease LOI with terms very disadvantageous to us, one of which is that WE pay him a commission (essentially to negotiate against us).
My question is: Is it typical that the Landlord pays a commission (4%) in a case like this? It's our existing tenant who wants to stay at a great rate, and we want to rent to them at that great rate. If the tenant insists on using this broker (their choice, I guess), we're obviously just going to bake the commission into their new monthly rate because we're certainly not going to absorb a 4% commission to keep our existing tenant on executing a simple lease option.
If there is an actual renewal option with a written renewal term in the original lease then typically there is NO broker. You should not have to pay a broker! Put the pressure on the tenant to pay any advisory or broker fees to their own broker
@Michael G. It is typical for the landlord to pay the broker's commission, which is a percentage of the total value of the lease (NNN excluded), however not for a simple option renewal.
Does the current lease have language describing how the lease renewal executes, determining new rent rates, escalations?
Typically an option to renew, is just that - a renewal of the original lease, not an entirely new one. The original lease remains in-force with only changes to the rent rate and term dates. Sounds like this tenant is going after a whole new lease? In that case, that wouldn't be an option to renew and I would present them with two options: 1) extend the current lease with updated market rate rent and new term (a true renewal option), or 2) you give them a new lease with terms you want, again with market rent. If they still insist on working with a broker, they are more than welcome to, but let them know you will not be paying any commission.
the owner would typically pay the commissions on a commercial lease; however, an option to renew is an option to renew. it just gets renewed. there is no new lease, no new leasing agents, none of that. it sounds like they aren't exercising their option to renew. they are essentially letting the existing lease expire and negotiating a new one. my response would be - we either renew as is as provided under the existing lease please plan on vacating as we'll start marketing. it is possible that we may come to terms on a new lease but no guarantees.....
@Michael G. It is typical for the landlord to pay the broker's commission, which is a percentage of the total value of the lease (NNN excluded), however not for a simple option renewal.
Does the current lease have language describing how the lease renewal executes, determining new rent rates, escalations?
Typically an option to renew, is just that - a renewal of the original lease, not an entirely new one. The original lease remains in-force with only changes to the rent rate and term dates. Sounds like this tenant is going after a whole new lease? In that case, that wouldn't be an option to renew and I would present them with two options: 1) extend the current lease with updated market rate rent and new term (a true renewal option), or 2) you give them a new lease with terms you want, again with market rent. If they still insist on working with a broker, they are more than welcome to, but let them know you will not be paying any commission.
Hi @Will Kenner - thank you for your reply and insights! Unfortunately (or maybe fortunately) the original lease Option clause was one single sentence that merely says "Lessor grants Lessee one 3-year option to renew the terms of this lease upon written notice from Lessee not later than 180 days before expiration." I'm assuming that this leaves the door open to negotiating a new rental rate and annual escalation?
I think the tenant just wants to stay and wants this broker to handle it, but this broker is seeing what he can squeeze out of us. Other things in his LOI were that we grant another option, that we refund the security deposit, that we allow unlimited assignment without us granting consent, etc..
I'll go with your option #1 above and simply decline his other proposed changes and see if we can preserve the Renewal concept at a new rate that bakes in his commission (and then some) - if he wants to earn that commission, let him go and sell the package to the tenant. I feel bad for the tenant but them wanting the convenience of having the broker handle it is going to cost them $10K in extra rent.
Thanks again for your advice here!
the owner would typically pay the commissions on a commercial lease; however, an option to renew is an option to renew. it just gets renewed. there is no new lease, no new leasing agents, none of that. it sounds like they aren't exercising their option to renew. they are essentially letting the existing lease expire and negotiating a new one. my response would be - we either renew as is as provided under the existing lease please plan on vacating as we'll start marketing. it is possible that we may come to terms on a new lease but no guarantees.....
Hi Sergey - thank you for your response! They are substantially changing other terms in the lease by asking for an additional option to renew, asking us to refund the security deposit, asking us to allow assignment without our consent, and insisting on us paying a commission amounting to almost $10K for the privilege of giving up all that.
I just wanted a sanity check that this should not be all that difficult or onerous on us!
Yep your sanity is there. Either renew or not renew. How is the market? Does your tenant maybe know that you won’t be able to re-rent?
Yep your sanity is there. Either renew or not renew. How is the market? Does your tenant maybe know that you won’t be able to re-rent?
LOL...thanks. I think the market is in our favor. There is not that much available, and the other rent comps are from $12.50/sqft (not nearly as nice as ours) to $22/sqft for new construction. I think we're a bargain at the $13.90/sqft that we're going to propose that bakes in this guys commission. We'd have been happy with $13.00 and not paying commission, but if they want us to boost our numbers and building value, we can accommodate that. :)
Then stick to your guns and no new lease. Their either exercise the option to renew or it goes on the market!
@Michael G. Although one line, it seems pretty clear that that terms of the lease are to be renewed, not a drafting of a new one. The fact they are trying to change the lease as a whole is unreasonable, in addition to their requests. That broker is seriously out of touch asking for the return of the deposit and unlimited assignment without landlord consent. That is just complete nonsense. I wouldn't even entertain that LOI, which by the way is irrelevant in the scenario of executing a lease option. Present them with an addendum stating the current lease will be continued at the new rental rate. (I've included what I use below). And if they don't like it, tell them what my attorney says "go pound sand".
Also, did they give you notice within the specified time before expiration?
Lease Renewal Addendum
The following is an Addendum to renew the Term of the Commercial Lease Agreement (“the Lease”) dated (Month/Day/Year, between (your entity) (“Landlord”) and (tenant's entity) (“Tenant”), regarding the lease of (suite) (“the Premises”) in the Property located at (property address) (the “Building”).
Tenant and Landlord agree to the following:
1. Lease Renewal Term.
(month) 1, 202X – (month) 31, 202X $XXXX
(month) 1, 202X – (month) 31, 202X $XXXX
(month) 1, 202X – (month) 31, 202X $XXXX
(month) 1, 202X – (month) 31, 202X $XXXX
(month) 1, 202X – (month) 31, 202X $XXXX
3. All other terms and conditions of the Lease shall remain in full effect for the lease and occupancy of (suite) during the Term.
excuse the formatting, didn't transfer over from Word correctly, but you get the idea.....
What does your lawyer say? Generally, just offer two rates one at FMV and no commission, one with their broker 4% and time value of money reflected in a higher base rent. It really doesn't bother landlords...
The main risk for you is if you pay out a commission, but the tenant defaults before you recapture your commission amounts. But thats always the game LLs/investors are playing in real estate.
If there is an actual renewal option with a written renewal term in the original lease then typically there is NO broker. You should not have to pay a broker! Put the pressure on the tenant to pay any advisory or broker fees to their own broker
Thanks all for the great replies. Thanks @John M. - we did end up just giving them a proposal that built in their agent's fee (and then some).
This was a good lesson for us - at first we took it personally but then realized that the tenant just doesn't want to deal with (or has no expertise in) deal(ing) with it and they really don't care what they end up paying. They are willing to pay the extra that we're going to charge them to compensate their agent. Once we got over this we just boosted the price and made it a win – win - win for everyone.
The second lesson here is how poorly our option clause was written! (we were assigned the lease when we bought the building). Basically, it was one sentence saying they had a single option to renew the lease, with no other terms, timelines, or conditions. This is leaving us stuck with a tenant who says they want to exercise their option, but it's been three months and they have not signed the proposal that we have in front of them, although they say they are fine with the terms in it. I still need to research this and find out how we can get them to either honor their commitment to exercise their option or withdraw it so we can find another tenant.
Thanks again for all the great replies!
Thanks all for the great replies. Thanks @John M. - we did end up just giving them a proposal that built in their agent's fee (and then some).
This was a good lesson for us - at first we took it personally but then realized that the tenant just doesn't want to deal with (or has no expertise in) deal(ing) with it and they really don't care what they end up paying. They are willing to pay the extra that we're going to charge them to compensate their agent. Once we got over this we just boosted the price and made it a win – win - win for everyone.
The second lesson here is how poorly our option clause was written! (we were assigned the lease when we bought the building). Basically, it was one sentence saying they had a single option to renew the lease, with no other terms, timelines, or conditions. This is leaving us stuck with a tenant who says they want to exercise their option, but it's been three months and they have not signed the proposal that we have in front of them, although they say they are fine with the terms in it. I still need to research this and find out how we can get them to either honor their commitment to exercise their option or withdraw it so we can find another tenant.
Thanks again for all the great replies!
So did your lawyer re-draft the renewal clause? Glad the money worked out
I really appreciate this conversation - My question goes one step further... We represent the Landlord. Tenant's original lease had one option to extend, which they exercised and is due to expire. An unassociated broker has reached out to me saying Tenant wants to stay an additional 5 years. This would of course be a brand new lease at FMV - what to do about this broker's expectation that our Landlord is to pay a commission. This is a new situation for me. Any advice would be appreciated. Is it wiser just to start marketing the space and find a new Tenant with our own brokerage team? Apologies if this is not where I start off asking a question...as I'm realize I just posted a reply.
Be willing to pay the commission and increase base rent, you don't have to, but that's what I would do.
Get the property marketed, you need to know your leverage.