How to Negotiate a Better Lease for Your Small Business
To ensure that you get the best possible deal for your business’s next location, this post will explain how to negotiate a better lease.
Negotiate a Better Lease for Your Business in 6 Steps:
1. Know the Market
The key to any successful negotiation is understanding both sides of the deal. With a commercial lease, your ability to negotiate favorable terms will depend on how competitive the office or retail market is in your desired location. For example, if the market is slow, you have more leverage over your potential landlord and can afford to be more demanding in your negotiation. Ultimately, it’s important to keep market conditions in mind when you begin any lease negotiation.
2. Consider the Length of Your Lease
The perfect lease should provide you with stability and flexibility. You can achieve both by negotiating a term of one or two years with an option to renew. By doing this, you have a location locked down while maintaining the ability to renew if things are working out or terminate if there’s a better lease opportunity.
Of course, you need to consider your unique business needs when evaluating the best lease term. For example, good retail locations are much harder to find than a location for a research lab. So, when you’ve identified a solid retail location, you’ll want to prioritize stability. On the other hand, you don’t want to be locked into a lease if you think more favorable opportunities may come up in the future. Either way, you should carefully consider the big picture when you’re negotiating the length of your lease term.
3. Understand the Cost Structure of Your Lease
There are several different types of commercial leases with various cost structures. These include gross, net, absolute, and percentage leases. Depending on the type of lease, your actual monthly costs may vary significantly.
For example, with a percentage lease, you’ll pay monthly rent plus a percentage of your sales. In comparison, with a net lease, you’ll pay rent plus taxes, insurance, and maintenance fees. This is important information to consider, as you should accurately compare multiple leases with different fee structures to make the right decision.
4. Evaluate Your Improvement Needs
If you’re going to make significant alterations to the property, you may want to focus your negotiation on convincing the landlord to cover the costs of these alterations. As the legal experts at Nolo point out, “If you’re willing to sign a long-term lease, the landlord will be more willing to pay for improvements to the property.”
Just keep in mind that, the more the landlord pays for property improvements, the less leverage you’ll have when it comes to other terms of your lease.
5. Ask for the Ability to Sublease or Assign
As a small business owner, you know as well as anyone that market conditions and business needs change rapidly. For this reason, it can be beneficial for you to have the flexibility to bring in another tenant to take over your lease. Perhaps you end up not needing as much space as you anticipated, or you find a better lease option. Either way, if you can sublease or assign your lease, another tenant can take over a portion or all your lease to offset your costs.
6. Require a Co-tenancy Clause for Retail Locations
According to Investopedia, “a co-tenancy clause in retail lease contracts allows tenants to reduce their rent if key tenants or a certain number of tenants leave the retail space.”
This is a very important consideration to make for any retail business. With a co-tenancy clause, you’re at least partially protected from business losses resulting from a significant change in the space around your retail location.
For example, in shopping centers where a large anchor store generates foot traffic, the other smaller businesses will see huge slowdowns if that large anchor leaves. A co-tenancy clause provides relief in this scenario.
Conclusion: Finding the Right Lease is Possible
Negotiating a lease for your small business is a critical component of long-term success. Your lease will be among your largest ongoing expenses, so you shouldn’t rush into any binding decisions. If you’re not confident about selecting it independently, hire a tenant broker to assist you. Although you’ll have to pay more in the short term for the broker’s services, they’ll ensure that your interests are represented. Plus, they’ll understand the market and will have unique insight into individual properties. However, whether you use a broker or not, make sure you understand the terms of your lease and how they affect your business before making a final decision.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.