Notes & updates: None currently.

Negotiating a Favorable Business Lease

Commercial leases are usually for an extended period compared to residential leases. Rent can be a substantial fraction of earnings. Commercial tenants commonly have further accountability than their residential counterparts. To acquire favorable arrangements over time, and to avoid expensive disputes with landlords, businesses must bargain for fair and thorough leases. The following are suggestions for bargaining. Make sure all your business’ bases are covered.

Consider the fine points of a commercial lease. Commercial leases are more complicated than residential leases:

  • The space being leased: including common areas such as lobbies, rest rooms, and elevators
  • Rent: including permitted increases and method of computation
  • Amount of the security deposit and conditions for its use and return
  • Duration of the lease
  • Whether rent includes utilities, taxes, and maintenance (gross lease) or excludes these items (net lease)
  • Option to renew the lease or a right of first refusal to purchase the property
  • Conditions for terminating the lease, including notice requirements
  • Signage regulations and restrictions
  • Whether improvements, modifications, or fixtures (build-out projects) will be added to the space, who will pay for them, and who will own them after the lease ends
  • Who maintains and repairs the premises
  • Whether and how the lease may be subleased or assigned to a third party
  • Whether the tenant must engage in alternative dispute resolution before resorting to a lawsuit

Understanding the details may help you to negotiate successfully and resourcefully. This knowledge may also help you from being blindsided in the future by issues that you may have believed the lease would otherwise resolve.

The initial draft of the lease will favor the landlord; you should try to improve the situation. Your landlord likely either wrote the lease or obtained it from an attorney or association that writes documents in favor of landlords. If so, of course it will favor him. A renter can, however, can agree to better terms, but only if he or she is willing to negotiate.

Do the research. Know the state of the rental market in the area. If the general going rate for similar rental space is $8 per square foot, and your prospective landlord wants to charge you $10 per square foot, knowing the going rates can leverage your negotiations.

Attempt to secure more than one potential location. If you look at one space, and your business will not have a location until you finalize the deal, you are negotiating from a weak position. Having a reserve location will let both potential landlords know that they aren’t the only games in town. You can use this as a tool to leverage negotiations of each proposed lease. If you cannot come to agreement with one landlord, you can pull out and go with the other.

Learn lease terminology so you cannot be taken advantage of. A price of $10 a square foot not always $10 a square foot. When the rental price includes only the rental space and not utilities and maintenance, as can be the case in a net lease, the actual rental cost can be much more expensive. Net leases require tenants to pay for more than space: often taxes, insurance, repairs, utilities, or any combination thereof. When the tenant includes the ancillary costs, the real price may be considerably higher. Understanding the terms of commercial leasing can prevent renters from agreeing to a very different deal than they thought they were getting.

Focusing on monthly payments can be a mistake. Monthly payments are constant and consequently the easiest cost to calculate in a lease. Other terms, however, may be equally important. If a rental property requires improvements, the renter should try to convince the landlord to make the renovations at the landlord’s expense as a term of the rental agreement.

The period of the lease is also important. A landlord might agree to rent a space at a low rate over a short term, but intend to increase rates to unreasonable levels once the business is established.. A difficult situation for a business owner is to face an expiring lease only to discover that he or she will have to accept the landlord’s higher rates or move the business. Paying more per month or including provisions for increases based on inflation or income coupled with a longer-term lease may be more beneficial than a low initial rate. Remember to negotiate clauses that allow termination of the lease in case of business failure.

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