Negotiating a commercial lease can be a long and daunting task, but that doesn’t mean you can’t come out of that process with a really great deal. Here’s some tips for being a strong lease negotiator, as suggested in the article “How to Get a Good Deal on a Lease”:
#1 Negotiate the Term of Your Lease and Rental Rate
One of the first things you’ll do is negotiate with your landlord the duration of the lease and how much you will pay, typically based on the square footage of the space. Conventional wisdom suggests that small businesses should play it safe with short-term leases, for example a year or two with the option to renew, but often landlords are willing to make substantial concessions, for example free rent for a period of time, for tenants willing to stay for a longer period, i.e. five years. This is something to factor into your decision-making process. Another thing to do before deciding on your rental rate is to remeasure the space. Sometimes the listed square footage is based on an old floor plan or has been reconfigured so many times that the square footage has changed.
#2 Expenses and Maintenance
The next thing to negotiate is all of the extras you will have to pay for in your space. A lot of this is based on the type of lease that you have, but typically most expenses get passed onto tenants in some form or another. The most common expense is common area maintenance (CAM) costs, as well as utilities. Be aware that landlords will also try to hold you responsible for bigger costs, such as repairs and maintenance, for example of the walls, the roof, and parking areas, and the heating and cooling systems. Be aware of this, especially in older buildings. It might be worth having the heating and cooling system, the plumbing, and the electrical system inspected to look for any obvious problems, which you can then bring up to the landlord as points of negotiation.
#3 Choose a Broker Carefully
Make sure that the broker you’re working with is really working for you. Be aware that a lot of brokers work for landlords and are paid on commission. One reliable source of recommendation is a good real estate lawyer, who can recommend someone who will work with you in good faith. You also want to make sure you’re working with a broker that understands your market, for example the office space market or the retail market. Ultimately, working with broker is very important for small businesses, and trying to negotiate a lease alone won’t necessarily save you money. Utilize your broker in negotiations, but remember that it is also up to you to stay abreast of and verify all of the points they are helping you negotiate.
#4 Have an Escape Planned
Is important to negotiate the details of terminating the lease upfront, even if you hope that never has to happen. There’re a few parts of the lease that can protect you in the event that things don’t go as planned:
- “Good-Guy” Clauses – most landlords will insist on a personal guarantee, but a good-guy clause in a lease means that you’re only responsible for rent owed before you leave a space if you terminate the lease early, rather than paying rent until the end of the lease term. These clauses are not very widespread, but it is worth asking about.
- Personal Guaranty Release – you might not be able to get a good-guy clause, but a lot of landlords might agree to release you from a personal guarantee after certain period of time, rather than paying rent until the lease ends.
- Sublease – this provision allows you to sublease a portion of your space to another business, which could be useful if you end up with space you don’t need and costs that are too high.
A few other provisions hold the landlord responsible for meeting certain standards in order for your lease to be valid:
- Exclusivity Clause – this clause prevents the landlord from leasing another space in the property to a direct competitor of yours.
- Co-tenancy – A lot of smaller businesses, especially in retail spaces, rely on anchor tenants to draw in a lot of customer traffic. The co-tenancy clause allows attendants to break their lease without penalty in the event that this anchor tenant leaves and is not replaced by the landlord within a specified period of time.
- Guaranteed Points – A lot of times landlords advertise the space as having a few guaranteed selling points, such as a certain amount of customer traffic or certain percentage of occupancy. If you can, try to get these things in writing with concessions guaranteed to you in the event that the property fails to meet the standards.
Keep these points in mind as you prepare to negotiate a commercial real estate lease!