The dynamic between tenants and landlords is changing. For a long time, a general understanding existed between landlords and tenants that though they may have divergent goals, they worked toward a business transaction that benefited both parties. In reaching an agreement, both parties had to get some of what they wanted. Landlords negotiated in good faith and were willing to understand a tenant’s needs; they were interested in creating a long-term relationship.
The landlord appreciated the tenant for the value they brought: they understood that the rent tenants paid provided the cash flow and paid the bills. They valued a tenant with good credit who provided stability and lived up to their end of the bargain. Similarly, tenants valued a landlord that was responsive and honest; they appreciated that the landlord was a good operator and a good business partner.
Again, though both parties had divergent business goals, a collaborative, business relationship existed.
Now, we are seeing landlords become more rigid. The shift is to a dynamic that is much less collaborative, at least from the landlord side. This is putting tenants in a tough position; they are increasingly at the mercy of the landlord.
How is landlord behavior changing?
Landlords are changing their approach to lease negotiation. We are seeing landlords empowered to dictate the terms of a lease and are not willing to find a middle ground. Although this is not the situation in every lease negotiation, it is becoming more and more frequent. To provide a clearer picture, let’s take a look at the two distinct phases of a lease negotiation.
Part One: The tenant and landlord negotiate the general business terms of the lease.
This includes things like rental rate, term, and concessions. This step also incorporates some of the more critical operational lease provisions, such as landlord responsibilities, lease renewal rights, and any other specific issues that need to be agreed to before the drafting of lease documents. In many cases, both parties will be represented by brokers who negotiate on behalf of their respective parties.
Part Two: Lease documents are drafted and lease language is negotiated.After both parties agree to the general business terms, lease documents are drafted and both parties negotiate the lease language (this step usually involves lawyers).
This is where we are really seeing landlords try to flex their muscle. Landlords are drafting leases with language that is extremely one-sided, and are completely inflexible and unwilling to compromise. This is becoming more common in lease “renewal” negotiations: the landlord drafts lease amendments with alterations to existing lease language that the tenant did not agree to.
Of course, the tenant has the right to reject his language; however, at this point in the negotiation, the tenant has lost a fair amount of its negotiating leverage. The momentum of the pending deal and the need to finalize the lease work against them. It is becoming clear that this is an intentional tactic by the landlord.
Landlords are exploiting the good faith and trust tenants have put into negotiations. They are intentionally deferring certain lease items in order to limit the tenant’s ability to negotiate for a fair and equitable result.
Why is this happening?
The overall market conditions have played a part in this shift. The past several years have seen increasing rents and limited vacancies, which has emboldened landlords.
This has also attracted new players in the market, who are more focused on short-term gains, and uninterested in long-term landlord/tenant relationships. Also, many landlords still have a bad taste in their mouth when rents were severely depressed in 2008-2010, and are using the current market conditions to try and claw back some of what they lost in the downturn.
Another motivation behind this shift is that landlords want to “standardize” their leases, which provides a distinct benefit. Standardizing the lease makes it much easier to finance and sell large lease portfolios. This is because buyers and lenders will require much less due diligence.
Additionally, it allows landlords to remain a lean organization with fewer employees and less money spent on legal counsel. Ultimately, this makes them more profitable. As many landlords continue to farm out their marketing, leasing, and property management work, they are not only removing labor costs, but they are able to function as the proverbial “man behind the curtain” and benefit from this inaccessibility.
What does this mean?
These changes to the landlord-tenant dynamic are not necessarily right or wrong, but they are significant. The effects are being felt most significantly by tenants who have operated in buildings for 10 - 30 years. When landlords insert their own language and become extremely rigid concerning what they are and are not willing to consider they are discounting the legacy of the tenant. They are discounting the fact that this tenant has paid for the building 2-3 times over, which creates a real rub with tenants.
Tenants understand that a lot of money was spent in acquiring the building and that landlords want to mitigate their risk and have the most landlord-favorable lease possible. However, those facts do not concern the tenant who has paid rent on time, every month, for the past 20 years. Building ownership changes, the market changes, things change. Raising the rent is reasonable, bullying tactics are not.
This is going to come home to roost for these landlords. There’s going to be a time when landlords no longer have the same sway they do now and tenants won’t forget how they were treated.