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7 Key Lease Renegotiation and Rent Reduction Considerations For Japanese Occupiers

Ron Gormley • 11/06/2020

7 Key Lease Renegotiation & Rent Reduction Considerations For Japanese Occupiers

Many of the CRE executives I speak to on a daily basis are seeking solutions for a safe and sustainable return to a “New Normal” workplace environment amidst uncertain economic conditions. For some, this means open and honest conversations with landlords when it comes to lease renegotiation and rent reduction. Here are my top 7 suggestions for you to consider in preparation for lease renegotiations and rent reduction requests with Japanese landlords.

 

1. Understand Your Situation

Recognize your occupancy rights, liabilities and opportunities under your lease agreement as well as any maneuverability afforded to you by leasing custom and practice in the Japanese market.

Lease type/notification dates

Traditional Japanese Leases (futsu-shakka) provide the tenant with the right to request a rent reduction at any point during the lease term (even mid-term) including the initial lease term and subsequent renewals. This right is strengthened by the reality that a tenant can terminate at any point during the lease.

A Fixed Term Lease (teiki-shakka) is generally less flexible as the ability to terminate prior to expiry is prohibited unless a break option or other special provision was negotiated into the agreement. If the expiration is more than 12-18 months in the future, an Extend and Blend deal could be an attractive solution offering front loaded concessions.

Appreciate your evolving occupancy needs
The trend to maximize space efficiency in Tokyo has been transformed by social distancing requirements as demonstrated by the 6 Feet Office workplace strategy. Objectives should include defining guidelines for your staff’s return to a safe workplace as well as longer term strategies to accommodate an optimized post-pandemic office environment.

Know your building’s vacancy
Be aware of your building’s occupancy situation including incoming / outgoing tenants and any pending vacancy. Just one lease termination could provide you with an opportunity to restructure lease agreements to secure reduced rents or other benefits. Being empowered with this information will be imperative to understand what the pressure points with the landlord will be.


2. Approach the Negotiation in a Strategic Manner

Just asking for a discount will not result in optimal terms and conditions. A structured approach combined with a leveraged strategy has been proven to result in a higher probability of success. This allows the tenant to negotiate from a position of knowledge and strength.

Leverage the right data
• Aggregate, analyze and leverage all data sources available. Using market information that is not biased towards the ownership side of the market is vital. Understand current and emerging market trends, pricing, and other factors.

Connect with neighboring tenants can help inform your strategy through comparison by using knowledge of their activities.


3. Deliver a Structured and Well-Timed Request

There are numerous factors that may prove critical in shaping go-forward strategy as well as the overall economic impact of current events which are still unfolding. Pursuing immediate relief/savings without a well-planned strategy is unlikely to yield the optimal outcome for your organization.

Articulate your Value Proposition. There are a number of items other than rent to potentially be negotiated. Japanese leases tend to offer a high degree of flexibility as lease terms are generally shorter (ie, 2-3 years) or may include break options if longer (5-10 years). Ensure that flexibility under the lease is retained and secure terms such as early termination rights, partial return of space, renewal options, and numerous other non-financial deal points.

Cash security deposits are hefty in Japan, typically 10-12 months of rent. Very small office buildings are typically from 6-10 months. Deposits are non-interest bearing and effectively unsecured loans that proportionately decrease/increase when the rent is revised. Although landlords have historically not been receptive to Bank Guarantees or Letters of Credit, or to the reduction of deposits, some have been more receptive to hybrid arrangements in recent years for higher quality tenants.

Sublease & Assignment Although commonplace in many other markets, Japanese leases strictly prohibit subleasing and assignment due to strong tenants’ rights. There has historically been a strong sensitivity to an unknown entity taking over from the original lessee and thus, the effective non-existence of a sublease market. If co-occupancy rights or assignment for a group company is desired then some flexibility to secure an assignment with prior landlord approval should be available.


4. Partner with Your Landlord

Where possible, landlords are generally empathetic with tenants that are facing true hardship and seek to foster relationships that will extend beyond the current lease term. A tenant’s request should be realistic. Like any negotiation, creative avenues of relief, be it CapEx, CAM, utilities, or parking versus full rent relief will demonstrate a willingness to find a solution. Also, many landlords will be more amenable to deferment (e.g. abatement to 2021). Consider the Landlord’s perspective which may depend on the ownership structure (e.g., Institutional Landlord, J-REIT or generational private landlord, etc.). In most cases, property operating expenses are likely to increase. Understanding your landlords’ ownership structure, scale, leverage, product mix, culture, and many other characteristics and objectives will have a significant impact on how they respond to requests for rent relief and/or lease re-structures.


5. Understand the Levers You Possess

Experience tells us that landlords respond well to opportunities to create long term value through partnership. Be sure to identify opportunities where you have multiple locations with the same or related landlord entity. Smaller, independent landlords may be motivated to address your specific lease. The actions, stability, and liquidity of co-tenants may also be points of leverage with your landlords. Work broadly across your organization and network to understand all levers that are impacting your sector and business.

A typical Japanese approach to real estate negotiations limits options and achievable conditions. Purely Western approaches tend to focus on the wrong issues and instead create impediments, which may eliminate improved solutions for reasons wide of the mark. Maximize value by using Western methodology in conjunction with Japanese custom and practices to leverage your position in the market.


6. Emphasize the Benefits Your Brand Brings

In an age where corporate social responsibility (CSR) is increasingly important in the eyes of consumers, shareholders, and the landlord community, having full awareness of the intangible benefits brought to the tenant mix of the building can have a significant long-term impact on a building’s culture, reputation and brand. Remind the landlord of the value that your firm provides to their portfolio from diversification to CSR.


7. Know That You Have Support

Cushman & Wakefield’s professionals are working diligently with clients experiencing similar, if not identical, challenges to you during this unprecedented time. Our collaborative culture has further connected our global leasing teams, enabling us to share best practices and successful leasing strategies that are achieving optimal solutions for our client base. Having the right real estate professionals can help guide you through the complexities we are all facing.

For example, when tenant relationships with landlords may be sensitive and/or long-term, we have taken a behind the scenes role to support occupiers. While the tenant maintains the direct contact with the landlord, we provide the strategy and script. This structure has proven successful when the tenant delivers the message aligned with pre-agreed tactics.


Conclusion

The race to savings and stabilization requires careful planning and knowledge of which levers can be pulled to reduce costs. While immediate pivoting to allow for business continuity is necessary, proactive planning on actionable portfolio strategies will prepare companies for What’s Next.

Leveraging the lessons learned from China and Europe at the onset of the COVID-19 crises, Cushman & Wakefield leasing professionals are helping organizations like yours develop an informed, collaborative style of negotiation that is proving to successful with landlords amidst uncertainty.

For a comprehensive assessment of your position consult a Tenant Advisor that first and foremost advocates the tenant's position and has a fully developed market view and knowledge.

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