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Whether you own a coffee shop or boutique retail store, one of the most important steps of starting a business is finding the perfect location to set up shop. Finding the right business location is challenging—after all, you need to find the right size space in a desirable location that fits within your budget. And if you’re like most small business owners, you’ll rent this space, meaning you’ll have a small business lease.
Negotiating your small business lease is crucial to ensure you’re getting a competitive price and that your business budget remains on track. And if you stay in the same location for multiple years, you will likely have to negotiate your small business lease each time it comes up for renewal, because your landlord will likely try to raise your rent throughout the life of your lease. This makes your relationship with your landlord an important one—a positive relationship will make your landlord much more receptive to negotiations. Whether you’ve never negotiated anything in your life or are a seasoned pro, these nine rules will help you successfully negotiate your small business lease.
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 small business lease carefully and negotiate for any modifications you want—from late payment penalties to the terms surrounding a potential lease break and even how and when your rent is due. You may not get them all, of course, but if you don’t ask, you’ll never know.
Whether you’re moving into a new space or renewing your existing small business 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 the Commercial Real Estate Listing Service, CIMLS.) This information will reveal if you or the landlord has the upper hand in negotiations.
If inventory is scarce and rents are at a premium, you likely won’t have much wiggle room in negotiating your small business lease. But, if there are several similar spaces on the market you may have more leverage. This is especially true if those other properties are listed for less money than you’re paying for your small business lease. Your landlord will be more receptive to negotiations if you can provide concrete examples of what else is on the market and what their prices are.
If you’ve had the same small business lease for several years and have been a stellar tenant (paying rent consistently and on time, abiding by the building’s rules, being tidy, keeping noise in check, etc.), 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.
It also helps while you’re doing research on other properties in your area that you also check out openings within your own building, as well. Landlords may offer incentives for new tenants, like two months of free rent, which you may be able to take to the negotiating table for yourself, as well. Again, you’ll never know until you ask.
And if you’re about to sign a small business lease for a new space and don’t have history with the landlord, don’t think you still can’t negotiate based on your past behavior as a renter. Provide references from past landlords touting your exceptional character to see if you can get a rent reduction.
Small business 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. Long-term tenants mean less work for the landlord because they don’t have to find new renters every year. Businesses, however, generally benefit from short-term leases, which give them more flexibility. You can often get better small business 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.
Make sure you’ve also taken a good look at your business finances and have an idea of how your business will grow in the future. You don’t want to sign a multi-year lease on a huge space when your business is just starting out and you don’t know what your profits will look. Likewise, you don’t want to sign a small business lease for a just-big-enough space if your company is rapidly growing. Being in tune with your business’s revenue and growth potential can help you find the right size space for the right amount of time.
If you signed a small business lease for a set amount of time with an option to renew, exercising that option 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 small business lease. Then figure out whether it makes more sense to negotiate a new lease altogether.
Be aware of when your small business lease is coming up for renewal, so you have plenty of time to research beforehand and come up with a list of changes you’d like to see in your new lease. If you don’t leave yourself enough time to come up with a solid argument, you likely won’t be able to effectively negotiate before your lease needs to be renewed.
Keep the other tenants of your building, office park, or shopping center in mind when negotiating your small business 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 to negotiate in your small business lease 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 the option to break your lease or reduce your rent if the landlord doesn’t find a replacement for that tenant within a certain time.
As you negotiate your small business lease, you hope your business will grow, but it’s important to have a backup plan 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. That way, if your business suffers and you can’t afford the space anymore, you can find another tenant to temporarily move in and shoulder the financial responsibility.
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 small business lease. No matter how skilled you are at negotiating normal sales for your business, it’s worth enlisting the help of a business attorney to review and negotiate your small business lease. This person will have more experience with this type of commercial contract and can more easily flag anything that seems out of the ordinary or like it could be a potential issue in the future. Beyond noticing any red flags in your small business lease, they can also advise on what counter-terms are most appropriate, as well as how to ask for them.
Negotiating a small business lease may not be your favorite thing to do, but it is important from both a cost and success standpoint. Even if you think you’ve found the perfect location, don’t be too quick to sign the paperwork before thoroughly vetting it—and having a legal professional do the same. And keep in mind, the more money you can save on your small business lease, the more you’ll have to put toward other aspects of your business like marketing your products or expanding your business.
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