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If you’re like most small business owners, you rent your office, retail or restaurant space. Which makes your relationship with your landlord an important one. How can you best manage that relationship and negotiate for what you want from your commercial lease? Here are 9 rules you must know.
Commercial real estate leases are much more complex than residential rental leases, so don’t assume the landlord is handing you a “standard contract” that you can skim and sign. Landlords carefully craft commercial real estate contracts to protect their interests and maximize their profits. As a result, you need to review every lease carefully and negotiate for any modifications you want. (You may not get them all, but if you don’t ask, you’ll never know.)
Whether you’re moving into a new space or renewing your lease, it’s important to educate yourself on the state of the commercial real estate market before you negotiate. Are there lots of similar properties sitting vacant, or is commercial space at a premium? What types of rent are other businesses in your area paying for similar spaces? (You can find out from a commercial real estate broker or at CIMLS.) This information will reveal if you or the landlord has the upper hand in negotiations.
If you’ve been a good tenant in a space for several years, don’t be shy about promoting that fact as you negotiate. Most landlords would rather keep a good tenant and get a little less rent than spend the time and effort to find a new tenant who may or may not be reliable. If new tenants in the building or shopping center are getting discounts or two free months rent, why shouldn’t you get the same? Again, you’ll never know until you ask.
Commercial leases vary greatly as to what is included in the cost. In addition to rent on the actual space, you may be paying for repairs and maintenance to your unit or the entire building and grounds; utilities; property taxes; insurance; janitorial services; security costs and more. Other times, the landlord pays for some or all of these costs. Know who is paying for what and, if you are paying for variable costs (such as utilities), see if you can negotiate a cap on these costs so you don’t face an unpleasant surprise.
Landlords tend to prefer long-term leases, which lock tenants in. Businesses generally benefit from short-term leases, which give them more flexibility. You can often get better lease terms on a long-term lease, but that can put you at risk if you need to move to a bigger space before the lease is up. At the same time, a short-term lease can expose you to sizable rent increases when the lease is up. To strike the best balance, see if you can negotiate a one- or two-year lease that includes an option to renew, and sets a cap on the amount of annual rent increases.
Exercising the option to renew basically renews your contract under the same terms. Don’t automatically exercise this option. Instead, review current conditions in the market, the state of your business, and what you’re dissatisfied with in your current lease. Then figure out whether it makes more sense to negotiate a new lease altogether.
Keep the other tenants of your building, office park or shopping center in mind when negotiating a commercial lease, because they can make or break your business. One clause you may want to negotiate for is an exclusivity clause, which keeps the landlord from leasing a direct competitor of yours a space in the same property. (Be sure you define what constitutes a “direct competitor.”) Another useful clause is a co-tenancy clause. If a key anchor tenant (such as a large retailer that attracts lots of customers) moves out of the development, your business may suffer. In this situation, a co-tenancy clause gives you have the option to break your lease if the landlord doesn’t find a replacement for that tenant within a certain time.
As you negotiate a real estate lease, you hope your business will grow, but it’s important to have a Plan B for the worst-case scenarios. Try to negotiate the flexibility to sublease all or part of your space to another business without violating your lease. Also make sure that any options to renew your lease are transferable. If you ever decide to sell your business, this enables the new owner to stay in the same space, and can be a big selling point.
As you can see, there’s a lot to deal with when negotiating a commercial real estate lease. No matter how skilled you are at negotiating normal sales for your business, it’s worth enlisting the help of an experienced real estate lawyer in reviewing and negotiating your lease.