The landlord negotiates leases as part of the business. Most tenants do it only occasionally. That difference in information and experience can affect the deal.
When commercial tenants negotiate directly with landlords, they may believe they are eliminating an unnecessary intermediary and saving money.
I understand the logic.
If the broker is receiving a commission, why not negotiate directly and capture some of that value yourself?
The problem is that the tenant may be giving up something considerably more valuable: market knowledge, negotiating leverage and an experienced view of the entire transaction.
The owner or landlord usually knows the building, the competing vacancies, recent transactions, tenant demand and the economics required to make a deal.
The tenant may know exactly what the business needs from its space and still have very little visibility into the landlord’s negotiating position.
That information imbalance matters.
What Is the Market Really Offering?
A tenant evaluating a renewal may know the asking rent in its building.
That does not necessarily tell the tenant what comparable landlords are actually willing to offer.
A commercial real estate broker active in the market should understand current asking rents, recent transactions, concessions, tenant improvement allowances, free-rent periods and other economic terms affecting comparable deals.
That gives the tenant something important before negotiations begin:
a credible understanding of the alternatives.
Without that information, it is difficult to know whether the landlord’s proposal is competitive.
Can You Actually Leave?
Negotiating leverage depends heavily on whether the other side believes you have a viable alternative.
If a tenant waits until the lease is approaching expiration and then asks the landlord for better terms, the landlord may reasonably conclude that moving would be difficult.
There may not be enough time to identify another space, negotiate a lease, complete design and approvals, construct the improvements, install technology and furniture, and relocate the business.
The strongest negotiating position is created much earlier, when the tenant still has enough time to evaluate the market and pursue another location if necessary.
A broker can help establish those alternatives, but the owner or tenant has to begin early enough for them to be real.
The Economics Go Beyond Rent
Lease negotiations can involve much more than the rental rate.
Tenant improvement allowances, free rent, escalation provisions, operating expenses, renewal options, expansion rights, surrender obligations and other business terms can materially affect the economics of the transaction.
Some of those provisions should also be reviewed by qualified commercial real estate counsel.
The important point for the tenant is to evaluate the transaction as a whole.
A lower rental rate can lose some of its appeal if the tenant is accepting greater capital costs or unfavorable terms elsewhere in the lease.
What About the Broker’s Commission?
This is usually the question behind the decision to negotiate directly.
The tenant may assume that eliminating its broker will automatically produce an equivalent reduction in the deal.
I would not make that assumption.
Brokerage compensation depends on the market, the transaction and the agreements involved. The tenant should understand how its broker will be compensated and ask the question directly before the engagement begins.
Then evaluate the broker the same way you would evaluate any other professional advisor:
What expertise, information and negotiating value are we receiving for the cost?
If the answer is unclear, that is a legitimate concern.
If the broker gives the tenant better market intelligence, stronger alternatives and a more informed negotiating position, the value may extend well beyond the commission discussion.
The Broker Should Strengthen the Tenant’s Position
Hiring a broker does not mean turning the transaction over and waiting for the result.
The tenant still needs to establish its business requirements, financial objectives, schedule and decision criteria.
The broker’s role is to bring market knowledge and transaction experience into that process.
That can include testing the market, identifying alternatives, comparing proposals, advising on business terms and negotiating with the landlord on the tenant’s behalf.
The tenant should remain engaged throughout the process and understand the recommendations being made.
Give Yourself a Real Choice
The best leverage in a lease negotiation is having an alternative you are actually prepared to pursue.
That requires time.
If the existing landlord knows the tenant has explored the market, understands its options and can relocate if the economics do not make sense, the conversation changes.
The objective is not to create an adversarial relationship with the landlord. A good renewal can be an excellent outcome for both parties.
The tenant simply needs enough information and enough time to determine whether it really is the best outcome.
Leadership Takeaway: Before deciding to negotiate a lease directly, ask whether your team has the market information, transaction experience and viable alternatives needed to judge the landlord’s proposal. The cost of representation should be evaluated against the quality of the negotiating position it helps create.
About the Author: Richard Neuman advises organizations on capital planning, project governance, and complex capital programs. He has overseen more than $2 billion in capital investments across commercial real estate, healthcare, utilities, industrial, broadcast, and development projects.
He writes candidly from an owner-side perspective about the executive decisions and organizational dynamics that shape capital project outcomes.
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No monetary incentive exists for the tenant rep broker to negotiate for lower rent. He gets paid by the landlord in an amount that increases proportionately along with the rental amount that tenant pays.
At some point, does the amount of the commission, when it’s received and the degree of impact it may have on brokers household cost obligations affect his level of aggressiveness in the negotiations? Has it ever led to premature roll over or caving on certain provisions? Each additional lease clause objected to by the broker on behalf of his tenant client delays the final execution date and increases the chances that the deal might die altogether.
Since when did going to the mat on verbiage in the notice provision become a higher priority than feeding ones family? Loyalty to ones clients at the expense of personal financial gain is a tough pill to swallow. Continuing to refuse to accept landlords continuous operations clause could mean the wife has to settle for a Geo instead of a Lexus.