7 Tips for Negotiating a Commercial Lease

Written by Ashley Sutphin Posted On Wednesday, 21 September 2022 00:00

If you’re renting a commercial or retail space, whatever a potential landlord provides you is ultimately a rough draft. This isn’t the same as a residential rental agreement because, in a commercial lease, it’s expected that you’ll go through several rounds of negotiations. It’s common for tenants to request changes to make sure they’re getting a contract that meets their needs.

With that in mind, the following are seven tips you can use to negotiate a commercial lease more effectively.

1. Think About the Length of the Lease

After you’ve found a commercial rental location, completed your rental application, and applied for your lease, you get the forms.

One of the first things you should consider is the lease’s length. Terms ranging from one to two years are best for small businesses, and the lease will often include an option to renew.

That way, you’re not locked into something for too long, but you can stay if you feel the space is a good fit. If you think you could find a similar location, you might want a shorter lease if rents go down or you don’t end up thinking the location is right for you.

If you can go long-term, it gives you some negotiation leverage. A landlord is more likely to offer concessions if they know they will have the space filled for a longer period. Of course, not every business can go with a longer-term lease. A startup, one example, may not be able to commit to a long-term lease.

2. Research Market Rents

The rent you pay is one of your primary considerations in a commercial lease agreement, so you need to make sure you know what the costs will be where you are, allowing you to negotiate a fair price. Ideally, negotiate a cap on your increases, so your commercial location stays affordable.

Along with researching comparable rents, you want to know what you need as a business. Think about your preferred location and your budget. Know what you want to get from moving or out of your chosen location.

3. Use a Lawyer

It’s a good idea, and for most businesses a necessity, to include a commercial lawyer when you’re negotiating a lease.

At a minimum, you should get the opinion of an experienced lawyer who understands commercial leases. Using someone who does general law or a family lawyer leaves you open to mistakes because commercial leases are complex and specialized.

4. Do Your Research on the Property

You want to gather information about the property to use in your negotiations.

For example, who are the other tenants? Are they going to be compatible with your business? Are they competitors?

What’s the traffic like for the building? Will there be enough parking for you? If other tenants have more traffic than you and use the building more, you might be able to negotiate lower payments for common areas.

What’s the neighborhood like, and how might this affect your business? Are there recent declines in market rents that could help you negotiate better lease terms?

Does the landlord have a good reputation? Check if any other tenants are trying to get out of their lease because they’re having problems with the landlord.

5. Identify Tenant Improvements

You should determine the improvements you’ll have to make to the space and what it might cost. Landlords aren’t usually excited to provide big tenant improvement allowances, but you might be able to get a landlord to offset your costs with the rent.

6. Identify Hidden Costs

Your lease could be either a gross or net lease. In a gross lease, all the costs are included. In a net lease, some costs come in addition to what you’re paying in rent. Many commercial leases will make a tenant responsible for costs like the upkeep of common areas or maintenance. You want to get details of the costs upfront and negotiate these to be as much in your favor as possible.

7. Carefully Check Your Termination Clause

Finally, you need to go over the terms of your commercial lease as far as default and lease termination. Ideally, you want a clause that gives you time to cure a default before eviction, especially one that allows you to pay a month’s rent instead of the entire amount you owe on the lease.

Try to negotiate penalties for early termination of your lease if you decide to leave before your term is up.

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