Are you trying to secure a commercial space for your business but worried about the negotiation process? Negotiating commercial leases can be tough and not knowing the ins and outs of terminology can make it a painful process. Here are 5 steps to follow for negotiating favorable lease terms.
5 Ways to Negotiate a Commercial Lease
As soon as you have chosen your ideal commercial space, the negotiation process begins. Most landlords have a set agreement that they will present you. The biggest mistake you can make is signing it without negotiating!
These standard agreements are almost always in the landlord’s favor. You need to comb through the contract carefully or you risk being ripped off. You may even need to go through many rounds of negotiations to get what you want. Here are 5 things to pay attention to.
Evaluate the Length of the Contract
When you first receive your lease contract, you need to look at the length of time you are committing to. As you may already know, commercial space is not cheap and the terms are much longer than residential leases. Depending on your needs and the specifics of your business, you may need to negotiate a different lease length.
If you are a small business or only starting out, consider a lease term of one to two years. This gives you plenty of time to make things work, while also giving you the flexibility to close up shop or move to another location if you need to. When signing a short lease like this, it is always a good idea to include an extension option so that you can stay if the location turns out to be the perfect spot.
If you are certain about the location of your business or you have a location-dependent business, then a longer lease is favorable. Longer leases can also give you more bargaining power or give you the opportunity to lock in rent if you think it’s likely to rise.
Compare Nearby Rent Prices
The rent for your new commercial space is likely one of the largest fixed costs your business has. This is why it is so important to make sure you are getting the best deal.
Once you learn the rental amount, you need to do a bit of shopping around to see what comparable rent in the area is like. Not only will you learn the prices for comparable spaces, you’ll also see what is available.
A lot of empty spaces means it is a renter’s market and you have more negotiating power. Even if you have your heart set on a certain space, having knowledge of nearby rent is going to give you some ammunition at the negotiating table.
When looking at the price, you will also need to consider rent increases that are built-in to the contract. Always aim to have a cap placed on these increases so your rent costs don’t spiral out of control.
Check for Hidden Costs
There are many ways business owners get caught off guard when negotiating commercial leases. Often, this is due to the technical language that hides costs. The number one thing to look for is whether the contract specifies a ‘gross lease’, meaning all costs are included, or a ‘net lease’ where you will be billed for certain extras.
Often, what looks like a cheap price is a ‘net lease’ and the extras charged for maintenance and other fees will bump the price a lot higher than you planned for! If possible, try to negotiate a ‘gross lease’ so that you know exactly what your monthly costs will be. However, if you can only get a ‘net lease’, then you need to inquire into what you will or will not be responsible for.
It’s a good idea to examine the equipment you’re responsible for maintaining. For example, before agreeing to pay maintenance on any HVAC equipment, always get it checked so that you don’t get lumped with the cost of repairing an ancient unit. With utilities, you should also be clear on how your usage is calculated and at what rate you will be charged.
Ask for Favorable Clause Modifications
Next, you need to try to add or modify clauses so that they better suit your specific situation. There are countless ways you can do this, but some examples include:
- Allowing sub-leasing so that you have the option to relocate, downsize or close before the end of the lease term.
- Restrictions on the landlord renting nearby space to a business similar to your own.
- Asking for capital improvements to the facility that benefit your business.
- Permission to fit signs to the building’s exterior.
- An option to terminate if a large anchor tenant that would drive customers to your business leaves.
The important thing when making clause modifications is to try and consider your needs now and into the future. Plan for both the best and worst case scenarios and insert or modify clauses that will make your life easier. This can be hard, but if you always remember to build in as much flexibility as possible – you are on the right track.
Make Sure There is a Termination Clause
Although it may be hard to imagine the circumstances that would cause you to terminate early, it does happen and you need the most favorable terms possible in case that happens. You will need to ensure that there is a way for you to end the lease early, especially for longer terms. There will be penalties for this, but you can make sure that they are as low as possible.
Also, try to limit the harshness of termination clauses allowable by the landlord. This generally means making sure there is plenty of leeway built-in to the terms for you to pay back defaults or unpaid rent before the eviction process begins.
While we have outlined the most common things to consider when negotiating a new contract, there are plenty of other things to look out for. The best thing you can do to make sure you get a good deal on your lease is to read all the terms and conditions and ask questions if you do not understand.
If this all sounds like a lot of time and effort, then you are right. That’s why many business owners choose to use a professional agent like Commercial Lease Locators to negotiate on their behalf. Let the experts do all the hard work getting you a favorable rental agreement so you can focus on growing your business.
To get in touch with Commercial Lease Locators and discuss your needs, all you need to do is drop into the office, send a message online, or call 512-920-6270. A professional agent will help you find the perfect commercial space and negotiate the lease for you.