Rent Adjustments: The Landlord’s Presentation May Be Misleading

During the term of the lease, or upon its expiration, it is common for the operator to ask the co-owners for a reduction in the commercial rent. In order to obtain this reduction amicably, the operator presents its landlords with a range of circumstances intended to demonstrate that its profitability is too low. Among these is almost always a rental burden that is allegedly too heavy; in short, the total amount of rent the operator pays to the co-owners as landlords is said to be too high.

However, upon breaking down the total amount of rent paid, it sometimes becomes apparent that a significant portion is paid to companies affiliated with the operator, which own the service areas (cafeteria, laundry, lobby, etc.). The rent paid to these companies for these facilities is often proportionally much higher than the rent paid to the investors, who, after all, financed the purchase of the building entirely on their own. Furthermore, the figure cited by the operator regarding the total rent paid to landlords (rent-to-income ratio)—which is supposed to be the primary basis for its request for a rent reduction—is entirely misleading and cannot serve as a basis for assessing the appropriateness of such a reduction.

Our advice: Acquire the service premises

Ownership of the service areas is a key issue, and co-owners should seek to acquire them since, in most cases, they do not currently own them.

In the event of a rent review, it is necessary to identify the owners of said premises and ensure that the rents paid are significantly lower in proportion to the rents paid for the private units (the rental value of the private units and the service premises cannot be identical, and this difference naturally favors the private units and not the other way around). Otherwise, the operator’s rental expense will be significantly skewed to the detriment of the co-owners when it comes time to discuss a potential rent reduction.