Article written by Illinois & Iowa Attorney Kevin O'Flaherty
November 1, 2019
Negotiating the right terms for a commercial lease can benefit your business in a variety of ways. In this article, we explain how to negotiate a favorable commercial lease, answering questions like, “What are the first steps to negotiating a commercial lease?” and “What are some common mistakes when negotiating a commercial lease?” Remember, as a business owner, it is your responsibility to read your commercial lease and completely understand all of its terms. A great commercial lease can make or break your business. Leases are legal contracts, so they should be closely examined prior to signing.
Different Types of Commercial Leases
There are 5 different types of commercial leases:
Single Net Lease, or Net Lease: Tenant only pays for utilities and property taxes. Landlord pays for maintenance, repairs, and insurance.
Net-Net, or Double Net Lease: Tenant pays for utilities, property taxes, and insurance premiums for the building. Landlord pays for maintenance and repairs.
Triple Net Lease: Tenant pays for all costs of the building, and landlord pays for only structural repairs.
Full Service Gross, or Modified Gross Lease (also called Modified Net Lease): Tenant and landlord equally split structural repairs, utilities, property taxes, maintenance, repairs, and insurance in a single “base rent.” This is the most common type of commercial lease when it comes to multi-tenant buildings.
Tips for Negotiating a Commercial Lease
Once you have expressed interest in leasing a commercial space for your business, some landlords can simply offer you a form that states the lease’s asking terms. In these forms includes a response section or an attachment for the tenant to counter offer. In most cases, it’s in the tenant’s best interest to have a copy of the initial terms in writing and submit a formal letter or other written documentation of the counter offer. This gives you plenty of time to research the lease’s terms, consult with an attorney, or compare terms with other leases you may be considering. Asking for terms in writing is not legally binding on your part to move forward with the proposed lease agreement.
While some commercial leases may truly be non-negotiable, almost every landlord or listing agent allows some “wiggle room” for negotiation. Negotiations can go back and forth several times, so be patient. If you have not heard back on your offer for 1 or 2 business days, feel free to follow up.
Here are some negotiating tips:
Identify the length, or “term,” of the lease you would prefer. A term of 1 to 2 years is typical for small businesses, with an option to renew included. If you know you could easily find a comparable location for your business nearby, a shorter lease may be better for you, just in case you want to relocate. If your business is heavily affected by location, you’ll want a longer term for security. In general, shorter leases give tenants more flexibility, while long-term leases ensure an affordable business space for a predictable period of time.
Research comparable rents. Know your area’s going costs for your industry in order to negotiate a fair price. Every landlord is going to want to increase your rent for each additional year; be sure to negotiate renewal options and specify a “cap” on rent increases to eliminate any potential surprises in the future. If it’s important to you, you can also negotiate the amount of your security deposit and the conditions for reimbursement. When you’re comparing pricing between two spaces, consider the different types of commercial leases we just discussed. What exactly does the rent include (utilities, repairs, taxes, insurance, etc.)?
Determine your desired occupancy date. Decide when you want to take physical possession of the commercial space by moving in, gaining access, or taking responsibility for the property and include it in writing. This may seem obvious, but sometimes the date you take possession of the property may differ from the date you start paying rent. For example, you could ask your landlord for an occupancy date of December 1, 2020, but only under the agreement that the first month be rent-free. In this case, your lease would actually start on January 1, 2021.
Demand favorable clauses (modifications to the lease that benefit you). Ask for the right to sublease or assign your space, just in case your business closes or has to suddenly relocate. Include a clause restricting the landlord from renting out a neighboring unit to a business similar to yours. Be sure to have the rights to install signage for your business, and ask the landlord to be responsible for improving or repairing the space before you move in. If you plan to renovate the space, or if you just want to keep the renovation option on the table for the future, offer to submit more detailed information about renovations for the landlord’s review to give you some sort of considerations for improvements.
Read the Termination Clause closely. In your commercial property lease, you’ll want a Termination Clause that allows you to pay one month’s rent instead of the entire amount owed on the lease. You’ll also want to negotiate any penalties for early termination of the lease, should you decide you want to leave before your lease term is up.
Common Mistakes When Negotiating a Commercial Lease
Everyone makes mistakes, even business owners. There are several mistakes commonly repeated by businesses who are negotiating their commercial lease. We will break down many of these mistakes and what impacts they may have. For more specific advice relating to your situation, you may want to consult with a business attorney.
Recycling lease agreements without updating terms. Many landlords reuse original lease agreements, which may not be up-to-date with the real space, due to remodeling, repairs, or simple measurement errors.
Failing to verify the space you’re renting. Tenants often overpay for incorrect measurements from landlords, whether due from error or intent. Be sure the actual space you’re planning to use for your business is referred to as the “usable” area, instead of paying extra for a percentage of common areas like lobbies, hallways, elevators, and loading docks.
Breezing over your operating expenses. When signing a lease, make sure you find out exactly what the company’s operating expenses are and whether or not you’re responsible for them, including taxes, utilities, maintenance, landscaping, and repairs. Negotiate out items that are not pertinent to your “usable” space.
Allowing an escalation clause to increase your rent exponentially. Escalation clauses exist to increase the base rent over a matter of years. While they are valid and extremely common with landlords everywhere to pay for increased building costs, escalation clauses can bury a naive tenant in costly add-ons. As a tenant, be sure to negotiate a “cap” on the amount of each year’s increase and try to exclude a rent increase for the first year.
Letting your emotions affect business decisions. Don’t negotiate in “panic mode.” Whether your current commercial lease is being broken or your new business is more successful than you were prepared for, stay calm and collected. Don’t feel pressured to sign a commercial lease agreement due to lack of time or experience.
Relying on your landlord’s word that the property is approved for zoning. Be sure to obtain permission from your city’s zoning officer prior to entering a lease negotiation. It doesn’t matter if your landlord approves of the zoning or not; if the town won’t let you enter the space you’re considering, don’t waste your time negotiating a lease, no matter how great the deal is.
Getting attached to one specific piece of property. Don’t put yourself at a disadvantage by assuming one commercial space is going to make or break your business. To enter negotiations, you’ll have to know when to identify a fair deal and when to walk away, even if you are in love with the property.
Consulting with “any” kind of lawyer. Choose an attorney who has experience with commercial lease negotiations. Feel free to check references of other business owners he or she has helped with their leases. A great real estate lawyer understands the game of your business and can advise you on negotiating the best deals for your particular situation.
No matter if you’re a tenant or a landlord, always be sure to comb through every line of a lease agreement. Do your research, stay calm, and know when to admit when you’re over your head. Signing a commercial lease is a serious commitment; if you are preparing to negotiate a commercial lease agreement, feel free to give us a call.
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