If you’re a landlord in NYC, negotiating a lease renewal with your current tenant can be challenging and awkward. You most likely had a broker intermediate the original rental price negotiation when the tenant first signed the lease. This time however, it’s likely your responsibility to negotiate directly with the tenant.
We’ll provide you with some pointers and other things to consider when negotiating a lease renewal in this article.
Why Is a Lease Renewal Beneficial?
Negotiating a renewal is almost always in the best interest of both the tenant and the landlord.
As a landlord, the primary benefit of renewing the existing tenant is that you eliminate the cost and uncertainty associated with a possible vacancy period. You’ll also avoid paying another rental broker fee. In addition, renewing the current tenant means you won’t need to spend money on cleaning or repainting the property and making various repairs and touch-ups.
The tenant benefits financially from a renewal by not having to incur the costs of moving to a new apartment. The tenant is also spared the time and headache associated with searching for a new home.
What are the Risks of Non-Renewal?
Despite the obvious benefits for both parties in renewing a lease, the conversation itself can be rather uncomfortable for landlords.
Here’s why:
If you fail to agree on terms for a lease renewal, the tenant will obviously be unhappy at the prospect of having to move-out and search for a new home.
Even if you and your tenant were on great terms during the entire term of the lease thus far, the relationship could rapidly deteriorate if you don’t agree on terms for a renewal.
They’ll obviously think you’re greedy or unreasonable for wanting more rent than they’re willing to pay.
This is highly problematic, as now you have an angry and resentful person living in your home. The tenant is obviously far more likely to cause damage to your property or create other mischief if they’re holding a grudge against you, even if the rent increase you were asking for was completely justifiable based on market conditions.
While most tenants won’t damage anything on purpose even if they’re disappointed, there’s always the risk of a worst-case scenario. In New York City, that worst case scenario is that your tenant simply refuses to move out, and possibly stops paying you rent.
New York’s politicians have made it increasingly difficult to evict tenants over the years, and it’s gotten to the point that it can literally take 24 months to evict a tenant.
Not to mention tens of thousands of dollars in legal fees and a long period of unpaid rent.
In one egregious example we’re familiar with, not only did the tenant refuse to move-out, but he then decided to countersue the landlord for harassment! Apparently in New York, deciding not to renew a free-market lease and reminding your tenant that he has to move out constitutes harassment! These sorts of things happen all the time in New York City.
If you get stuck with a litigious tenant who capitalizes on New York’s ultra-loose legal protections for landlords, it could wreak havoc on your finances.
Even if your tenant decides not to go nuclear and lawyer up, there’s also a slightly less worst case scenario: your tenant ceases all communication with you and refuses to allow access to show the property to new prospective tenants.
If your tenant does this, it means you effectively can’t start searching for a new tenant until the old one has already moved out.
This all but guarantees that you’ll have one, two or even three months of vacancy before your new tenant moves in.
This will cost you a lot of money, particularly if you have a mortgage on the property.
Another risk of not renewing a tenant’s lease is that they internationally damage the property before they move out. In another example we witnessed first-hand, a tenant literally smashed tile, made holes in several walls and left the apartment littered with trash. This tenant also never even bothered to return the keys to the landlord, even though that was the only set. As a result, the landlord had to hire a locksmith to break into her own apartment!
To add insult to injury, New York’s politicians recently capped the size of the security deposit to just one month of rent. If your tenant decides to smash a few windows or do something really awful, that security deposit will provide a laughable amount of protection.
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Tips for Speaking With Your Tenant
Now that we’ve told you about the risks associated with not renewing your tenant’s lease, let’s give you some pointers for the conversation:
First, remember to always remain calm and collected. Resist the temptation to take things personally. If your tenant sends you an aggressive email, wait a day or two before responding. Always sleep on any email you write before sending it to the tenant.
When it comes to the rental amount, do your homework. Don’t ask for an above-market rent, and always leave some wiggle room.
In any negotiation, it’s important to make the other person feel like they’ve won.
Put another way, both sides need to feel like they’ve gotten something out of the interaction.
Unfortunately, many landlords propose a take it or leave it, best and final rent amount upfront and refuse to negotiate. This obviously comes off as aggressive and an attempt to corner the tenant. This misguided approach does not give your tenant the ability to feel like she or he has gotten anything out of the interaction, and this ultimately makes it highly unlikely that the negotiation will result in a meeting of the minds.
In addition to analyzing rental comps, figure out how much it will cost the tenant to move and factor this into the renewal price you’re considering.
Aside from moving costs, try to assign a value to the time and energy it will take them to find a new rental.
How many similar properties are currently available for rent? In other words, how much optionality and leverage does your tenant really have?
If the negotiation breaks down, the best ‘get out of jail free’ card is to simply tell your tenant that you’ve decided to move into the apartment. This diffuses any perception on the tenant’s side that you’re greedy, since the conversation is no longer about the rental amount.
Obviously, we don’t recommend that you lie about this. But perhaps for a moment, you’ve genuinely concluded that the rent is insufficient and you fancy moving back into your property!
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Negotiating a Renewal When Rents are Rising
Negotiating a lease renewal is particularly difficult during periods of rapidly rising rents, such as in the months after NYC’s post-COVID reopening. For tenants who negotiated extremely low rents during the pandemic (in some cases up to 30% off), the prospect of renewing a lease at a significantly higher monthly rent is a tough pill to swallow.
For example, one tenant we spoke with in June 2021 (the month of NYC’s pandemic reopening) had been asked by his landlord to to renew at $7500 (a 19% increase) from an original rent of $6300 negotiated during the depths of the pandemic.
By extension, a tenant who received one or more free months of rent as an incentive during the initial lease term will likely be very unhappy at the prospect of the net effective rent increasing by 10% or more if the lease is renewed at the full gross rent (without receiving any free months).
As a landlord, the best way to mitigate the risk of tension and conflict during the renewal discussion is to set expectations at the time you negotiate the original lease terms.
If you’re painfully aware that rents are falling, make it clear to the tenant that the unusually low rent you’re offering is temporary.
Let them know what the rent was before the recent decline, and set expectations that you will obviously renew at a much higher rate (and most likely closer to what you were charging previous tenants) if market conditions improve.
Another great way to lay the foundation for a successful renewal conversation during a period of rising rents is to keep the gross rent closer to the rate you charged previous tenants (before rents declined) and reduce the net effective rent to the market rate by offering the tenant any number of free months of rent.
For example, let’s say that the gross rent is $8,000 and you offer the last 2 months free on the original 12 month lease term.
Using our net effective rent calculator, this means that the tenant’s net effective rent is $6,667/month.
In this scenario, the tenant will become accustomed to paying the full $8,000/month outside of the free months (which are typically at the end of the lease term). Should rents rise, you can simply ask the tenant to renew at the gross rate of $8,000/month (without any free months).
Although the new net effective rent is much higher without the free months, the tenant is less likely to put up a fight since they’re already mentally conditioned to writing you a check for $8,000/month.
This is much less confrontational than asking a tenant to pay $8,000/month after they’ve been paying just $6,667/month during the original lease term.
If you’re negotiating a renewal with your tenant during a period of rising rents, be sure to also set your own expectations appropriately as well. The truth is that there’s a much higher chance you’ll have to find a new tenant once the initial lease expires, regardless of whether you utilize the strategies above.
If the renewal doesn’t work out with your current tenant, be nice about it and try to maintain the best possible relationship with your tenant. You want to make sure that the tenant remains cooperative so that they’ll provide access to interested parties as you try and find a new tenant.
It seems the biggest risk even with a good tenant (i.e. at least good credit, pays the rent) is with appliances breaking down through “wear and tear,” as it’s often impossible to prove negligence was the cause of any breakage.
Especially with today’s inflation and labor shortages, it’s super expensive to get any contractors into the city, especially Manhattan with all its congestion and expensive parking. As a result, places like “The Appliance Doctor” will charge $160 before tax just to send someone in for a diagnostic, not including any repairs/parts for any follow-ups needed. It’s similar for HVACs, Soho HVAC which I’ve worked with before charges $175 just to show up to diagnose the problem, but at least Jon there did a good job.
So what’s the solution? Well, I suggest using a standard REBNY lease agreement. You’ll see in the agreement that the landlord is responsible for repairs & replacement of broken appliances when it’s through no fault of the tenant, which puts the landlord in a pickle. However, you can get around this because there’s a standard clause where you can essentially write in a deductible. For example, in one lease I had put $1,000 as what the tenant must pay to cover repairs/replacement of appliances before anything is spent by the landlord. I really like this strategy as it works just like a deductible does in insurance, it aligns the interests and encourages the tenant not to be negligent or cause things to break. And perhaps just like insurance, if they cause a lot of costs, they should expect their premiums (or in this case rent) to increase when it comes time to renew.
In the future, I’m thinking an even better strategy is to perhaps rent slightly below market, but have an even higher deductible to save yourself the headache. For example, maybe a $5,000 or $10,000 deductible, and in return you have a slightly lower monthly rent. That would align the incentives for everyone I believe.
Another lesson I’ve learned as a landlord is to not provide an automatic renewal option in your leases, as tempting as that may be, even if you’re able to pre-negotiate a reasonable rent increase for year 2. Why? Because you want option value to get out, get a new tenant, or raise rents higher than that if the market has improved. You never know how it’ll be with a tenant, even a very pre-screened one, after one year. Give yourself option value to get out.
Lastly, never compromise on the credit check and screening process, even for a friend. I’ve realized that it’s often better to stick to your guns and have people follow your set rules from the beginning, because if the tenant is complaining about giving you proof of insurance or letting you see their purchase application (due to “privacy” reasons), how can you trust them to pay you rent in a tough situation?
Stick to your guns. If something is the responsibility of the tenant, make sure you make it clear to them that it’s on them. And make sure they respect your time. If need be, get a ticketing system in place that you (or your assistant) only checks during business hours. No tenant should have your cell and be able to text or call you late at night.