Taking on a commercial lease is a major step for a small business owner and requires a great deal of planning. It’s also an exciting step that offers substantial benefits.
The first thing you need to know is that commercial real estate lease agreements are written to benefit the landlord. It’s the tenant’s responsibility to negotiate the lease terms to better serve their interests. In most cases, the commercial leasing agent or landlord will expect some modifications to the agreement before it’s finalized, so you’re not outside the bounds of normalcy to request changes.
There are five steps to take to negotiate a smart and beneficial commercial real estate lease.
Step 1: Set the Negotiation Stage
The first step in negotiating a commercial property lease that suits your business is to research the real estate market. When you know what’s available, how much it’s being leased for, and the types of options currently offered in the market, you’re in a position of strength.
While anyone can do this type of research on their own, it helps when an experienced broker does it, and offers the best options in a given market. A broker can also offer useful information about the location and market that will help you, the tenant, negotiate a more favorable deal.
Step 2: Research Rental Rates
It’s in your business’s best interest to know what the going rates are in your area, in order to negotiate a fair deal. While the initial security deposit(s) and rent amount will be clearly specified at the beginning, it’s also important to address rent increases and how they’ll be handled. Most landlords like to increase the rent annually, but many are willing to cap those increases at a certain limit, so the rent stays affordable.
A savvy renter may be able to work out a deal where the rent doesn’t increase if they agree to a longer term, or if they make improvements to the property. It’s never a bad idea to throw an offer out there and find a way to mitigate rent increases.
Step 3: Find Hidden & Additional Costs
Monthly rent isn’t the only cost associated with leasing a commercial property. Some commercial leases cover everything, including utilities, maintenance, repairs, and even cleaning. In other cases, the monthly rent is solely for the space; the tenant is responsible for paying for everything else.
In addition, some leases only cover certain aspects and not others. It’s important to thoroughly read the lease terms to avoid any hidden or additional costs that weren’t made obvious.
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Step 4: Consider the Lease Length
When it comes to a commercial lease, every aspect should be carefully considered, including the length of the agreement. New and small businesses that need space but aren’t location-dependent do well with commercial lease terms of one to two years, with an option to renew. This helps you manage costs and get to know the market before plunging into a long-term lease.
Businesses that are location-dependent, such as restaurants or tourist attractions, require spaces with long-term lease terms (sometimes 10 years or more). If this applies to you, as with any contract, it’s important to read the fine print and make sure that the initial lease term and renewal options are acceptable and beneficial to you and your company.
Step 5: Tenant Benefit Negotiations
Lease agreements are fairly standardized and always created by the landlord with their own benefit in mind. That doesn’t mean they’re not willing to modify a lease to suit the tenant’s needs. For example, if there are other commercial spaces for rent on the property, a tenant might ask for a clause restricting other businesses similar to theirs from renting. Or you can add a clause that allows you to sublease the property if you decide to move or close the business before the lease ends.
It’s also possible for a tenant to negotiate landlord improvements to the property prior to moving in. It’s important to keep in mind that landlords need tenants (they need you just as much as you need them), and they rarely turn down reasonable tenant requests when writing up a lease agreement.
Negotiating a favorable commercial lease agreement as a small business is a challenge, but it’s quite doable. It’s really all about understanding the commercial real estate market in your area and working with that information to find the perfect property with the right terms.
The critical thing to remember is that you have agency. You’re not helpless and you don’t have to just take what’s given. Tenants who enter into a commercial lease without taking the time to counter the landlord’s offers often find that the lease ultimately doesn’t benefit their business. Those that do negotiate, however, improve the odds that their business will not only succeed in that location, but will thrive.