Commercial Lease Renewal Option - Commissions - who pays?

Question

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.

John M. · Answer

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

Sergey A. Petrov · Answer

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?

Will Kenner · Answer

@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.

• The renewal term of the Lease (the “Term”) will commence on the 1st day of (month), (year)
(the “Commencement Date”) and will expire on the 30th day of (month), (year) (the “Expiration Date”), unless terminated or extended as provided in this Lease.
• 
• 2. Renewal Base Rent. Tenant shall pay, without demand to Landlord, rent (“Rent”) for the Premises in the sum of:
• (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

(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.

Ronald Rohde · Answer

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.

Ronald Rohde · Answer

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.

Eileen Baston · Answer

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.

Ronald Rohde · Answer

So did your lawyer re-draft the renewal clause? Glad the money worked out

Michael G. · Answer

Thanks all for the great replies. Thanks @John Mckee  - 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!

Will Kenner · Answer

excuse the formatting, didn't transfer over from Word correctly, but you get the idea.....

Sergey A. Petrov · Answer

Then stick to your guns and no new lease. Their either exercise the option to renew or it goes on the market!

Commercial Lease Renewal Option - Commissions - who pays?

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