It is obvious that ‘location’ is key to finding office space. If you aren’t in the correct line of sight then customers won’t find you. One hopes that this part of renting an office or retail space is common knowledge!
What seems to be less obvious, but no less critical, is negotiating your lease. A poor lease agreement can drain you financially even if you are acing sales targets.
Knowing how to negotiate the terms of your lease is as important as achieving great sales!
Specifics of commercial leases
Unlike home lease agreements a commercial lease tends to run for longer than home lease periods; commercial leases can run for between 3 – 5 years. A commercial lease structure is usually more flexible and subject to a range of negotiable factors.
The type of lease you agree to as tenant is subject to factors like:
– Paying a lower base rent but being responsible for maintenance or facility costs.
– Or paying a higher rent amount in which all these overhead costs are inclusive in the rent amount.
If you are a first time leasee and don’t know your potential yet you may prefer paying a premium rental; this caps your expenses and clarifies your overhead budget requirements.
Here are some different kinds of leases entered into by commercial tenants provided by Forbes.
- “Single Net Lease, Net Lease: tenant only pays utilities and property tax; landlord pays maintenance, repairs and insurance.
- Net-Net, or Double Net Leases: tenant is only responsible for utilities, property taxes and insurance premiums for the building; landlord pays maintenance & repairs.
- Triple Net Leases: tenant responsible for all costs of the building, except the landlord is generally responsible for structural repairs.
- Full Service Gross, or Modified Gross Lease (also called modified net lease): split structural repairs and operating expenses (property taxes, property insurance, common area maintenance and utilities between the tenant and landlord called ‘net rent.’”
Your chances of achieving flexible negotiation terms on your lease structure are more likely with an independent landlord. Corporate landlords are less flexible; malls are a good example where net rental and structural changes are usually fixed and non negotiable. In these scenarios the negotiable items are more about negotiating perks; there are many little things that are open to negotiation which can turn the lease in your favour.
It is these smaller details that can either make up for higher net rent or they can lower the net rent.
Tips to negotiate a commercial lease
Establish your budget upfront; what are your must-haves and like-to-haves.
The first thing to do is to establish your budget. This exercise includes:
– What is critical to have? (e.g. sublease clause)
– What is a nice to have? ( e.g. free parking)
It is the nice-to-haves that will become negotiable items.
Use a brokerage to negotiate on your behalf
Don’t negotiate the lease structure yourself; this is why reputable brokerages are worth their commission! A broker will be able to spot specific clause opportunities (e.g. sublet clause or early termination) and other negotiable terms (base rent determined by actual sq meterage vs stated sq meterage)
Negotiate on more than one location at the same time.
To negotiate from a place of strength negotiate on more than one location at the same time. This will give you the option to walk away from at least one of the negotiations, putting you in a better position to get what you want.
Negotiate net rent
The net rent a landlord asks for and what he / she will accept are two different things. Find an agreeable net rent amount that requires both parties to compromise. This can sit at about 10 – 15% below the advertised base net amount.
Check the square meterage yourself
It is common that the square meterage advertised and the actual sq meterage are not the same. Make sure you measure the space yourself to ensure you are not paying for space you do not have! It is usable space you are paying for so make sure all the stated space is usable by you. Common areas are an example of space which is not yours to pay so be vigilant.
Get better base rent by negotiating a longer lease term.
As the tenant your aim is to negotiate the shortest lease length with the greatest benefits. Check with the landlord what they will exchange in the form of benefits for longer tenancy.
If you cannot get what you want from a 3 yr lease then negotiate with the landlord for a 2 yr lease with renewal options. It is also a good idea to negotiate a fixed net rent increase subject to the renewal clause.
New commercial ventures will benefit by accepting a higher net rent for a shorter term lease the first time around. Better to focus on getting favourable termination and sublease clauses to bring peace of mind.
Achieve free rent periods
While a landlord may not want to drop the base rent he / she may be willing to offer a rent free period per lease year. This could translate into 2 months rent free per year of the lease. Make sure you also include all over head costs as a part of the rent free period.
Ask for a fair “cure” period.
Lets say you are late in paying rent. The purpose of a ‘cure period’ is to secure you from receiving penalties for such situations. A ‘cure period’ give you a period of time to rectify this. Without one you will be subject to ‘late fee’s’ and penalties which can add up if you don’t have one in place. This should be one of your non negotiable items so don’t sign a lease without one in place! Mistakes and circumstantial challenges happen so be secure.
Challenge early termination fees
Many aspects of a lease are negotiable so check to see if you can achieve a drop in these fees.
Be able to sublease
If you do decide you need to move before your lease period is up it is a great idea to have a sublease clause in place. Without one you will be subject to paying two leases which will be a major financial drain on you. Rather find a new tenant to sublease, which can only happen if you have this clause in the lease.
- Be able to walk away if an anchor tenant walks
Lets say you move into a retail space because of a major anchor tenant being there. If that actor tenant moves out you may well be sitting in a dead space. Hence a co-tenancy clause allows you to break off your lease early should that actor tenant leave.
Block direct competitors from moving in to the space
Try to have a clause included in your lease which blocks the landlord from allowing direct competition from moving in. This is an often unconsidered option which could stop your potential revenue from being cannibalised.
Negotiate on the TI period and costs
If you are moving in to a retail space the chances are you will want to change it / fix it up to suit your specific needs. These requirements come at a cost and take time. In some cases the landlord will cover the expenses through TI (Tenant installation). In other instances you will pay. Should this be the case you must try to avoid having to pay both rent and paying for fixing up the space as well. In an ideal situation you want the landlord to pay for TI and lower net rent during this period. This may not always be possible so you may need to settle on one or the other. Try for both though.
Discover and negotiate all ‘perks’
It might not be easy or possible to shift corporate landlords on base rent or lease structure but corporate landlords can offer other benefits. This could include free parking, free communal services or free wifi. Added up these save you healthy amounts of money throughout the duration of your lease. You may think nothing is negotiable but that is a tactic. Don’t pay attention to that. Push for negotiation always!
Conducting lease negotiations can be tough (don’t do it without a broker!) but with enough time and more than one option to consider you will be operating from a place of strength! You may not get everything you want, but then, a healthy negotiation comes down to a healthy comprise. Make sure you are getting this otherwise you may be choosing the wrong space or dealing with the wrong landlord!