If you are an entrepreneur or business owner, having a good commercial lease is key to running a successful business. Rent can easily become one of your greatest expenses and being able to actively negotiate favorable lease terms puts your business on the right track.
Otherwise, you may end up with a long list of unexpected costs which could further damage your profitability. That being said, we are going to discuss some tips to help you negotiate favorable commercial lease terms and in turn, protect your future financial needs.
1. Understand Your Business’s Needs & Costs
Before you go into negotiating a lease, you have to understand the full scope of your company’s space needs and potential costs.
Take a hard look at your company’s current and future commercial space needs and work your budget around those needs. It is important to have a budget for your business in general to prevent you from incurring any unnecessary costs.
You want to ensure that you are signing onto a lease that covers everything you want to get out of moving into a new space. On that same note, you want to carefully examine the incidentals landlords might ask you to pay.
After you create and finalize your budget, you want to ensure the incidentals fit within those confines. Additionally, a rent increases should be noted so you can be prepared for those changes. That being said, do not be afraid to ask your landlord for more details about potential changes.
2. Invest in a Lawyer
A lawyer is a great way to bolster your negotiation in a commercial lease. On one hand, a good commercial lawyer who understands commercial leases is a fount of knowledge.
They will be able to understand the ins and outs of how a commercial lease work. Moreover, they will keep you from making rookie mistakes when it comes to signing a commercial lease.
For example, many businesses will use a general lawyer or even a family lawyer. In turn, they end up with a lease full of unexpected costs. Leases are complicated matters and you want to ensure you have the best guidance available.
3. Evaluate Your Lease Length
After you have found a commercial rental location and completed your rental application, estate lease application, you next have to deal with the real estate forms of your lease. This is where you have to work out the length of your lease. Now, there are a number of lease lengths that can accommodate different businesses.
For smaller businesses, a lease length of one to two years is ideal along with a renewal agreement. There is enough wiggle room in this lease length to stay for a short period of time but with the option to stay if you end up liking the location. Moreover, a longer lease provides more security for your business in the long run.
A shorter lease is also ideal if you are unsure of how rent fluctuates in the area. If the rent prices are high, a shorter lease allows you to leave if you find it unfavorable.
4. Evaluate Lease for Hidden Costs
After the lease length, you want to examine your lease for any hidden costs. This greatly depends on what kind of lease you get.
For example, you may get a “gross lease”. In a “gross lease”, all costs are included in the rent. You may get a “net lease”, where you pay your rent and pay separate costs.
Regardless of the type of lease, most commercial leases will require the tenant to pay for all costs concerning maintenance and general upkeep of the space. However, you should not skim over these details.
You want to be sure to get the details on these costs from the very beginning. It is important to understand what you are responsible for, so you know what costs to include in your budget.
Moreover, learn the conditions of the systems you will be responsible for so you can learn the estimate and negotiate the costs. You can even negotiate to have your landlord take on the cost, but you would have to also trade for a higher rent.
5. Research Competing Rates
Another way to strengthen your negotiation skills is to make sure you do your homework about the market pricing for commercial leases in the area. This is key to being able to negotiate for a fair price.
Landlords tend to want to increase rent prices each year. You can, however, negotiate a cap on the increase so it stays at a reasonable price for you. At the same time, you can also negotiate the cost of your security deposit as long as you trade off on the return conditions.
6. Know Your Termination Conditions
Lastly, know your termination conditions. Could you be kicked out of your space for accidentally skipping a rent payment? What happens to your business if the space is sold to a new landlord? If the need arises, how do you break the lease?
In general, you want a clause that allows you to have a default before being evicted. In other words, you want a clause that allows you to pay a month’s rent instead of what is left on the lease.
Additionally, you should aim to negotiate any penalties for an early termination. If there is no room for negotiation, but you don’t want to say in the space, consider subleasing.
Subleasing can allow you to move your business without having to pay the lease termination fees. Moreover, it can help you cover part of the rent.
All in all, the most valuable skill you can have is read your commercial lease closely. Read it more than once so you understand every aspect of it. This allows you to be better prepared for your business’s financial future.
It also allows you to understand what benefits you have and what you can negotiate. Moreover, it just makes you a better tenant in general. Let us know if you have questions.