How to reduce the lease rate in an existing contract? Negotiating lease terms

Regardless of whether there is a need to lease new space or the existing contract is about to expire, it is always worthwhile to check the alternative solutions available on the market. It might turn out that it is possible to get new, lower rates — this will be discussed in detail by Tomasz Mika, National Director, JLL. Is it possible to reduce the lease rates for an already leased building?  

Tomasz Mika, National Director, JLL: If the tenant’s current lease contract for a warehouse or industrial property is about to expire, they should investigate the market with regard to the potential relocation or negotiating better terms within the existing contract. This is the perfect moment to try to optimise one’s costs. However, before looking at the available options, the tenant should carefully check the provisions related to the lease period and the conditions of its termination, as disregarding them might entail negative consequences. If there are no restrictions on the part of the tenant, one can begin negotiating their lease rate. When renewing an existing contract, it is often possible to receive new, more attractive lease terms.

When should one start negotiating their lease terms?

As soon as two years before the expiration of an existing agreement, the tenant can start negotiating the terms or searching for new space. Regardless of the chosen solution, the tenant must acknowledge that each of them involves a specific period for conducting talks with the building owner or choosing a new location. The short period reserved for formalities is disadvantageous to the tenant, as the market might not be able to offer any adequate property at that time, and the owner has the right to reject the suggested terms.

What is the next step in negotiating better terms?

Having performed a proper analysis, the tenant should work with a consultant to prepare a request for quotation and send it to selected developers, as well as to the owner of the currently leased warehouse. The received bids should be compared with regard to their commercial and technical terms. The support of a consultant is invaluable at every stage of this process. The renegotiation and negotiation procedures are complex and divided into many phases, and might involve many reversals. The key to success is relying on the expertise and knowledge of the advisor.

How to choose the best deal?

The next step is inspection of the proposed locations and meetings with property owners. At this stage, the tenant can get acquainted with the offered property and receive answers to any questions and doubts that may arise. In the next phase, lease terms are negotiated and a short list of the most appropriate warehouse property is drawn up. This is a key step in the entire process. The investor might also receive the best terms from the current owner of the property and decide to extend the lease term in the previously leased location.

Is it worthwhile to negotiate lease rates?

Base rents in most regions in Poland are stable and relatively low. According to JLL data, strong competition among the developers and their high activity is reflected in effective rates. In order to retain an existing client or acquire a new one, they offer a wide range of exemptions and financial incentives. Therefore, when it comes to expiring lease contracts, it pays to make decisions that optimise costs and favour business growth.

Tomasz Mika