Creativity in Lease Negotiations – Rental Increases

Almost all leases contain provisions for increasing the rent during the initial term of the lease or lease extensions. The following tips will apply to Landlords and Tenants.

One of the most negotiated parts of a lease is usually the base rent at the commencement of the lease. Once you get past the base rent, the negotiations on rental rate increases begins. 

Initial Term of the Lease

During the initial term of the lease, rental increases usually follow a pattern of annually or halfway between the term of the lease. Of course, if there is a lease extension, the rent then is typically increased. The various methods of calculating the increase are Cost of Living adjustments that increase or flat stated increases in the rent.

After negotiating thousands of leases in my career, I found another method that could satisfy the tenant and the landlord with their negotiations. Normally the lease provision states, “the rent shall increase, or similar automatic provision.” What if the language were to state the rent “shall be subject to an adjustment?”

Slight Changes in Language

This slight change in the language regarding rental rate adjustments is a small but a significant modification to rental rate increases. My interpretation is that rental increases (a) are optional; (b) if they are imposed, they must occur by a certain date;  and (c) cannot be made retroactively. 

As an example of the language subject to means that the landlord must (1) take decisive action in which to notify the tenant in writing that the rent will increase ; (2) notice must be stated by a specific time limit; (3) if the landlord missed the time frame in which to provide notice of an adjustment, cannot make up the previous increase in the future adjustment dates.

Why this is an interesting provision is that it is not automatic. For instance, during the Covid lockdown, many businesses were shut down, and that is not a time for a landlord to be aggressive and raise the rent. Also, during a recession, when there are substantial vacancies in the immediate area, it would not be prudent for a landlord to impose the automatic provision within the lease.

Language Can Be Beneficial to Both Parties

This language change in the lease can be beneficial to the parties of the lease. For the landlord to agree to this provision, it demonstrates to the tenant fairness in rental rate increases. In some of my previous blogs, I pointed out that the relationship between landlord and tenant was similar to that of partners. The landlord should consider his tenants as partners, and any interruption of a tenant’s loss can be a serious issue to a landlord.

The modification of the language “subject to an increase” should demonstrate to the tenant that its rent will not constantly increase unless market conditions dictate the increase. The tenant should consider that the landlord is sensitive to market conditions and natural conditions that affect the tenant’s business, for example, shortage of materials or supply chain issues.

In closing, this slight modification of the lease language should be an excellent way of bringing the parties to a lease together.

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Segal Commercial
2221 Barry Ave., Suite 200
Los Angeles, CA 90064