You’ve been operating a business for a year, and now the rent for your premises has increased. You feel that this increase doesn’t match up to what other businesses in your area are paying, and you want to know if and how you can negotiate a reduction in rent. Below, we look at what steps you can take to negotiate a reduction in rent from your landlord.
Check Your Lease
The first step is to review your current lease agreement. Rent is reviewed in several different ways, including:
- CPI (Consumer Price Index) increases;
- Market rent reviews; or
- Fixed percentage increases.
It’s then important you know which type of review applies to your premises.
CPI is an indicator used to adjust the dollar value of fixed payments to correspond with inflation. It is usually designed to increase from a base amount at a certain percentage each year of your lease. For example, a common CPI increase clause will include a formula for calculating the increase, such as the most recent rent multiplied by the CPI to calculate the new amount.
Market rent reviews are more complicated and involve considering the rents payable for similar premises in the area. This can be costly as it usually requires an assessment by an independent valuer. You can read more in our article about market rent reviews.
On the other hand, a fixed percentage increase is very straightforward, meaning that on the anniversary of the lease, the rent will be increased by a set percentage each time, such as 3.5%.
After you understand how your rent is calculated, you can assess the amount of your increase compared to what is stated in your lease. If this does not align with how your landlord is supposed to calculate your rent, you can discuss this with him or her because they may be breaching the lease by providing you with an incorrect rent review.
It is also worth speaking to other tenants in your building or the area to compare what they are paying against your increase. This will help you determine whether or not the increase is reasonable compared to other businesses in your area. It may be helpful to consider speaking to an independent property valuer who can assess the rent that should be paid for your premises. You will need to weigh up whether the cost of their services is worth it if it will help you negotiate a reduction in rent.
Gathering information about the area will also assist you when negotiating with your landlord. For example, if there are tenants in the building who are leaving, some of the shops may be vacant. The landlord will then have more incentive to keep you as a tenant.
Now that you have checked your lease and have gathered information about the amount of rent paid in the area, you can discuss a rent reduction with the landlord. It may be that you will need to speak to the landlord’s property manager to start the negotiations.
Providing them with evidence of what you believe you should be paying, as well as any external factors that can support a reduction, will help your case. For example, if your business is struggling and you can’t afford the increase, showing them financial statements of the business will help them understand your position better.
It is also helpful to show them the benefit they get from your tenancy. For example, if you have been consistently paying rent in an operating business, the landlord/property manager may find themselves without a tenant able to pay rent if they continue with the increase.
This is particularly the case if the increase is unreasonable for the market rate in the area. If you have a difficult property manager or landlord who is not willing to discuss a reduction with you, it may be worthwhile speaking to a specialist leasing lawyer who can advise you on your best options in the circumstances. They may be able to negotiate on your behalf or can advise you on your options to terminate the lease if you cannot afford the rent increase, and the landlord is unwilling to negotiate.
If you have been informed of a rent increase for your commercial lease and believe the increase is unreasonable or you are not able to afford it, it is best to first examine your lease to confirm how your rent review is calculated. Following this, speaking to other tenants in the area or gathering further information from other sources about the market rate for rent for your premises will help you to negotiate a reduction. Contacting a leasing lawyer may be worthwhile to assist you to negotiate a good reduction for your business.
If you need assistance with reviewing your lease or negotiating with your landlord, get in touch with our commercial leasing team on 1300 544 755.