Use Rent Escalation Discussions as Opportunity to Control Costs

August 11, 2016
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Rent escalation might be on the back burner if seemingly more valuable items—like cotenancy clauses and exclusive use rights—are up for negotiation. But tenants that are new to commercial leasing should be especially aware of what they’re agreeing to in the rent escalation provisions of their leases; a mistake can be costly and last the entire life of a lease. Here’s what you can do to improve your rent escalation negotiations:

#1: Understand concept ahead of negotiations. Commercial landlords include rent escalation provisions in their leases to ensure that rent keeps up with inflation and anticipated cost and market increases over the term of the lease. Most commercial leases are signed for a term exceeding one year, and a landlord wants to make certain it structures its lease so it collects sufficient rent over the life of the lease to cover anticipated cost increases, and to ensure it does not commit to a lease with a tenant for rent at a lower rate than it might be able to collect at a later date.

#2: Know you can reap rewards of clause. Rent escalation isn’t just a protective measure for landlords, though. While a tenant always wants to minimize the amount of rent it pays, a rent escalation provision can provide a benefit to a tenant, too. Depending on the type of rent escalation included in the lease, the rent escalation provision might cap the tenant’s exposure for cost increases and inflation. So look at rent escalation discussions as a good opportunity for you.

#3: Nail down certainty. Tenants should be aware that they’ll need to agree to rent escalation, but shooting for predictability so they aren’t surprised by escalations is a key strategy they should consider. If a tenant is able to limit rent escalation to a certain percentage increase per year, it will know going into the lease what amount of rent it must pay each year. (A tenant should be wary of agreeing to annual increases dependent on market conditions or increased costs without a cap on the amount of an increase from year to year.) Keep in mind, though, if you’re negotiating for shopping center space, be prepared for the owner to be more reluctant to agree to fixed annual increases, because market conditions may be subject to greater fluctuation.

For tips on how to avoid the pitfalls of rent escalation, plus tenant-favorable model lease language to use in your provision, see “Negotiate Fair Rent Escalation Provisions for Life of Lease,” available to subscribers here