Frequently Asked Questions – Real Estate
Negotiating a Favorable Business Lease
Commercial leases are made for the long-term, at least five to ten years. The payments may be a significant percentage of business income. Tenants generally have greater responsibilities than in any residential lease. In order to get the best deal over the long haul, and to prevent costly disputes with the landlord, businesses must negotiate a favorable and highly detailed business lease. Below are some pointers for getting a good deal, and making sure all your business’ bases are covered.
Pay attention to all the details of a commercial lease. Commercial leases are much more complicated than residential leases. Below are just some of the elements commonly addressed in a commercial lease:
- What space is being rented, including common areas such as hallways, rest rooms, and elevators.
- Rent, including allowable increases and method of computation.
- Security deposit and conditions for its use and return.
- Period (term) of the lease.
- Whether your rent will cover utilities, taxes and maintenance (called a gross lease) or whether you will be charged for these items separately (called a net lease).
- Whether you have an option to renew the lease or a right of first refusal to purchase the property.
- If and how the lease may be terminated, including notice requirements.
- Specifications for signage.
- Whether improvements, modifications, or fixtures (often called build-outs) will be added to the space, who will pay for them, and who will own them after the lease ends.
- Who will maintain the premises.
- Whether and how the lease may be assigned or sublet to another party.
- Whether disputes must be mediated or arbitrated as an alternative to court.
Understanding all the details will allow you to negotiate effectively and creatively. It will also keep you from being caught unawares by an unfavorable or unfamiliar term in the lease.
Your lease will favor the landlord-it’s your job to improve the situation. Your landlord wrote the lease, and of course it will favor him. However, a renter can significantly improve terms, but only if he or she is willing to spend time and effort negotiating.
Do your homework. Know what the rental market is like in the area. For example, 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, being well informed will allow you to challenge that pricing.
Try to have more than one location lined up. When you are negotiating for only one space, and your business will not have a location unless you close the deal, you are dealing from a weak position. Have a backup location, and make sure that both potential landlords know that they are not the only game in town. This can give you leverage to improve each proposed lease. Besides, if you cannot get the deal you need from one landlord, you can walk away without a backward glance.
Understand leasing terms so you will not be caught unawares. When is the price of $8 per square foot not really $8 per square foot? When it is only part of the calculation in a net lease. Net leases require tenants to pay for more than space-often taxes, insurance, repairs, utilities, or any combination thereof. By the time the tenant pays all these costs, the real price is considerably higher. Knowing the language of commercial leasing will keep renters from entering into a very different bargain than they thought they were entering into.
Focusing only on monthly payments is a mistake. Monthly payments are ongoing, and are therefore the most obvious expense in a lease. However, other terms are equally important. For example, if a space requires build-out, it is to the renter’s advantage to convince the landlord to do the construction free of charge or at a highly reduced rate. The length of a lease is also very important; a short-term favorable rate may not be in the renter’s best interest. One of the most difficult situations for a business owner is to have a lease expire after several years, only to discover that he or she will have to accept the landlord’s much higher new rate or move the business. Paying slightly more per month or building in some increases based on inflation, but having a longer-term lease, may be more beneficial than a low initial rate.
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