Bargaining, utility and rents. Analysing the effect of potential lease termination on rent negotiation outcomes
| Pages | 353-364 |
| DOI | https://doi.org/10.1108/14635789910271746 |
| Published date | 01 October 1999 |
| Date | 01 October 1999 |
| Author | Patrick McAllister,Heather Tarbert |
| Subject Matter | Property management & built environment |
Academic papers:
Bargaining,
utility and rents
353
Journal of Property Investment &
Finance, Vol. 17 No. 4, 1999,
pp. 353-364. #MCB University
Press, 1463-578X
ACADEMIC PAPERS
Bargaining, utility and rents
Analysing the effect of potential lease
termination on rent negotiation outcomes
Patrick McAllister
Department of Land Management, University of Reading,
Reading, UK
Heather Tarbert
Strathclyde Graduate Business School, Strathclyde University, Glasgow,
Scotland
Keywords Lease, Bargaining, Negotiating, Landlord, Rent
Abstract This paper analyses the effect of potential lease expiry on the rental negotiation
process and levels of rental agreed. Several observers have noted that tenants may use the
threat of lease termination at rental negotiations in order to obtain a rental and/or other
concession. It is argued that it will often be rational for the landlord to make a rental
concession in these circumstances and a model that identifies a theory-forecasted concession
level for landlords is developed. However, the bargaining process will often cause deviation
from an equilibrium solution. The concession level of the landlord will be a function of four
variables: expected landlord's cost of void, probability of tenant relocation, landlord's risk
preference and the effects of the bargaining process. Utility theory is used to illustrate why the
risk averse or risk neutral landlord in a potential lease termination situation will always
maximise his/her utility by conceding an amount on the open market rental value provided
that the landlord perceives the probability of lease termination to be greater than zero.
However, although it is possible to identify a positive solution to the calculation of maximum
concession, behavioural approaches to bargaining theory suggest that differences in
individual negotiator's attributes, social contexts and cognitive biases will also affect the
outcome of a negotiated rent setting process.
Introduction
The growth of short leases and the widespread introduction of break clauses in
the first half of the 1990s have produced a marked fall in lease duration. This
paper addresses the effect of potential letting termination on levels of rental
agreed and develops a model that identifies a theory-forecasted concession
level for landlords. However, it is also argued that the bargaining process will
cause deviation from a determinate equilibrium solution. Subjective Expected
Utility (SEU) theory is applied to explain why it is economically rational
maximisation behaviour for the landlord to make a concession on the Open
Market Rental Value (OMRV) and therefore why the potential to terminate a
letting offers a tenant a bargaining advantage in negotiations about new rental
levels at a point of new rent negotiation. However, although a determinate
solution can be obtained via the application of neo-classical utility-based
theory, it is then argued that the calculation of a point solution will be prone to
error and that the bargaining process can also affect the outcome.
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