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Lease renegotiations. How to bring warehouse costs down?

Lease renegotiations. How to bring warehouse costs down?

30 march 2020

Do you want to negotiate, or perhaps renegotiate, your lease conditions with your landlord? Find out how much you can save and how best to prepare.

The Polish warehouse market is dominated by fixed-term leases with most tenants opting for three- or five-year lease periods. By contrast, in the case of BTS (built-to-suit) schemes, leases tend to be made for seven, ten or fifteen years. As a rule, such agreements cannot be terminated or amended before their expiry date.

There are exceptions to every rule, though. Appropriate preparations for talks with the landlord and successful negotiations can be a game changer and translate into immediate and notable savings or lower costs.

Lease expires – what’s next?

At the end of a lease term, a tenant is faced with a dilemma: to continue with the current lease, to relocate to a different building of the same landlord, to move to a new location, or to seek alternative arrangements such as an owner-occupied project or a BTS scheme. The decision will depend on the tenant’s circumstances, needs and priorities. This is where it is advisable to hire an adviser to get an overview of the current market situation and available options, identify opportunities and prepare for challenges.

Some tenants will consider renegotiations early, i.e. long before their lease expires, for a variety of reasons such as special business circumstances, temporary difficulties, or to make an additional capital expenditure in a building (to ensure the lease term matches the asset depreciation period).

How to bring your warehouse rent down?

An adviser engaged to renegotiate a lease will first review the tenant’s current situation and business profile, specific requirements and expectations. Choices will have to be made with regard to the following key issues:

preferred legal form: freehold or leasehold,
an optimal location with regard to business operations and labour availability,
alternative locations,
a building’s standard and technical specifications,
expected commercial lease terms (frequently determined with reference to the current market conditions),
other client-relevant issues and circumstances, and
other relevant lease provisions.

As part of the next step, the adviser will determine - together with the tenant - whether the currently occupied building meets the tenant’s requirements and to what extent.

Another task of the hired professional will be to prepare a financial analysis of the proposed scenarios and compare them with current costs. In addition to differences in charges (rent, service and utility charges), relocation expenses will have to be considered: costs of the relocation itself, costs of space adaptation in a new location, staff reshuffling, business interruptions, and other related costs and expenses.

Following the review of the tenant’s preferences and market opportunities, the adviser will help define negotiation objectives and prepare a strategy for negotiations with both the current landlord and other bidders. Next, after preliminary negotiations, the most favourable pitches are short-listed for final negotiations.

When it comes to renegotiations, many companies would prefer not to move at all. They will make an a priori assumption or conclude after a preliminary analysis of the market and current situation that they would fare the best in their existing location where they would usually benefit from business continuity and lack of disruptions. They will, however, also want to renew leases on favourable terms and conditions such as rent holidays, reduced rent payments, building improvements or refurbishments. This is also feasible, and we can effectively assist such tenants in it.

Benefits of lease renegotiations

A lease expiry is an excellent opportunity to assess and reconsider your current warehouse space use. Both the tenant’s experience and the adviser’s expertise are important in this.

Lease renegotiations may help cut business operating costs considerably - often with immediate effect! They are also a good opportunity to review the size of the leased space and the number of parking spaces, to review technologies in use and some soft aspects of cooperation with the landlord such as the quality of services.

Successful renegotiations will help the tenant take advantage of market opportunities, bring costs down and ensure business continuity and stable growth in its current location. They will also save the tenant the relocation effort, including relocation costs and organisational disruptions.

When is the right time to begin renegotiations?

Landlords very often include provisions on automatic lease renewals on the same terms (usually with no abatements to the base rent). Before deciding to take no action and opting for an automatic lease extension, it is advisable to review lease conditions against the current market situation. In order to avoid time pressure, it is best to consult a letting adviser at least 12 months before the cut-off date after which a lease is automatically renewed.

The adviser will highlight the current situation and trends in a region, will help prepare for talks with the landlord, direct the tenant’s focus to important details and to issues best to be avoided, and carry out a ‘stress test’ by asking difficult questions the tenant should be prepared for. It should be reiterated that tenants can also renegotiate their existing leases, but need to have the right arguments at hand..

Our long-standing real estate experience shows that many tenants are still unaware of the benefits they could gain from properly prepared and conducted lease renegotiations. Many companies choose not to amend their leases at all or decide to do it on their own. Unfortunately, this usually ends with much worse results than could be achieved otherwise if leasing experts were engaged.