Anyone who has spent time in commercial real estate or has had the opportunity to read a lease quickly learns one fact: this it’s a landlord’s world. Upon digesting the implications of what “triple net” or “over-holding” means, your preconceived notions of the typical landlord-tenant relationship disintegrates (likely founded on notions from residential real estate). You quickly see that there almost appears to be no rules.. Or atleast very few! Read the Residential Tenancy Act (RTA), and you’ll quickly understand the rules of the game; read the Commercial Tenancy Act (CTA) and you will wonder if anyone else has ever read it before.. and if they have, why they bothered. Because of this, power in commercial real estate more dramatically shifts towards based on two factors: Leverage and Sophisticated.
Leverage: They have something that is high-value that the other party needs.
- Landlord example: Owning the building with a great space for lease in a low vacancy market
- Tenant example: They are a national brand that would increase the value of a property, ex: a bank!
Sophistication: They understand the technicalities of the rules, and how to manipulate them to their advantage.
- Landlord example: Including a very narrow renewal notice period, such as no earlier than 8months, and no later than 6months.
- Tenant example: Putting a “cap” on the maximum rentable square footage, thereby mitigating their risk incase the building is remeasured unfavorably
From a practical standpoint, neither of these variables are fixed.
Likely the most effective way of increasing one’s sophistication, for both landlord’s and tenants, is to better understand commercial leases. To do so, it’s better not to ask “how” as opposed to ask “who” which means paying the extra money to hire a qualified lawyer or realtor.
Leverage is more closely tied with assets, whether it’s a tenant’s brand or landlord’s building and is therefore inherently less flexible. That considered, tactful negotiation can sometimes help position you more advantageously... put more directly: negotiate hard.