Many business owners seeking office, retail or other commercial spaces, believe that when a landlord or broker delivers a lease to a tenant it is a ‘take it or leave it’ scenario. However, this is far from the truth. In fact, it’s actually the tenant that has the ball in their court.
The best way to get the most beneficial lease for you and your business is to understand how to negotiate favorable lease terms before signing on the dotted line.
In this blog post, we will share some essential tips for tenants to keep in mind when navigating the lease negotiation process. Whether you’re a first-timer or a seasoned renter, these tips will help you negotiate a more favorable commercial lease – one that protects your needs and works to your business’s best advantage.
Determining the Lease Term
With extension options and escalations, commercial lease terms typically run anywhere from five to twenty years. To make a determination as to how long your lease term will be, you will want to consider several economic and personal factors. For example, brand new businesses may find themselves better off accepting the higher price of a short-term lease the first time around, while focusing on getting favorable termination and subleasing clauses for peace of mind. This gives them more flexibility and reduces their risk. On the other hand, when dealing with an established and stable business, committing to a long-term lease often provides a tenant with more benefits than a short- term lease. By selecting a long-term lease, the tenant can ensure they will have an affordable business space for a predictable period of time. The key takeaway here is this: remember to select the lease term that best suits you and your business needs.
Non-Compete Clause
The success of your business not only depends on your location, but also on the surrounding competition. Sure, many tenants will have a non-compete clause in their lease prohibiting the landlord from leasing space to tenants with a similar business in the same location, but how can you be sure that the same landlord does not lease to a similar business in any other shopping centers he may own in the same area? You may not know it, but the same landlord may own a shopping center across the street and decides to lease it to a similar business. Will competition directly across the street hurt your business? It sure will. So, do your homework and make certain that the non-compete not only includes the shopping center your space is in, but also the shopping center in a 3-5 mile radius the same owner may own. Remember, Non-compete clauses give tenants a competitive edge and help them to maximize sales.
CAM Costs and Audit Rights
Every year the Landlord will provide the Tenant with an invoice specifying the Tenant’s Additional Rent and/or operating costs. In the event the Tenant disagrees with the Landlord’s invoice, it is essential that the Tenant include language in the commercial lease granting the Tenant the right to examine and audit the Landlord’s books in respect to the Additional Costs and/or operating costs. Without this provision the Tenant may have to pursue lengthy and costly court action to try to obtain a right to examine and audit the Landlord’s books. Tenants should also try to include language which specifies a penalty in the event the audit reveals a discrepancy, to ensure that fair and accurate Additional Rent and/or operating costs are being charged.
Tenant Improvement Allowance
If negotiated properly, a commercial lease can be a significant tool for a tenant to start a business. This is especially the case with regards to the tenant improvement allowance (often referred to as “TIA” or sometimes just “TI”). A tenant improvement allowance is a sum of money allocated to the tenant by the landlord for improvements of the space. The TIA usually pays for improvements such as new flooring or space re-configuration. The TIA is stated either as a per-square foot amount or a total dollar sum. Generally, if the improvements cost more than the agreed-upon sum, you pay the extra amount. With this in mind, commercial real estate spaces are rarely tailor made for a particular tenant’s needs. More frequently, you are acquiring a space that previously housed a completely different type of business. Even if this is not the case, you are likely going to want to make some improvements one way or another. In such a scenario, you will want to negotiate a TIA. After the landlord has conceded to a monetary amount of TIA, you will then need to discuss the following: Who will do the design? Who will do the work? When will it get done? Who will pay for it?
Negotiating the tenant improvement allowance is one of the most decisive parts of the lease negotiation process. A tenant can use it as leverage when negotiating their lease, as it has the potential of dramatically altering the overall leasing costs and impacting the tenant’s bottom line.
Reviewing the Lease
If there is one common factor in all commercial leases, it is that the “standard” lease document always favors the landlord. Moreover, having this highly complex document dropped in your lap can be extremely daunting—and that is okay. It is human nature to glance through such documents, sign on the dotted line, and then contest any detrimental provisions once they become applicable. However, a commercial lease agreement is a contractual instrument that can have unintended legal affects on you and your business if not scrutinized properly. There have been countless cases wherein landlords offer spaces with their standard lease forms, and tenants, believing they have no power to negotiate, sign a lease that ultimately ends up being the reason that particular business fails. Moreover, oftentimes larger landlords have several standard lease forms that they use in different scenarios containing fine print/boiler plate language that is ambiguous and difficult to understand. However, if you take the time to read the lease in detail, you will not only come out with a better understanding of the substance of the lease but also where the landlord stands on many negotiable areas.
Some of the topics included in the deep, dark holes of a lease include issues such as: relocation rights, tenant exclusives, and hidden fees. Most of these terms are frequently included and often negotiable. As these are generally the most overlooked and impactful clauses, it is important to understand their roles in the lease.
Final Thoughts
Whether you are negotiating a lease renewal or leasing a new location for the first time for your business, always try to negotiate more tenant favorable lease terms prior to signing a commercial lease. While you may have your commercial real estate broker and attorney review the lease, it’s important that you read and fully understand what you’re signing up for. In fact, the most important thing you can do is read it, and make sure you understand all the clauses and how they could potentially impact your business. If you truly understand this, then you will have the knowledge to effectively negotiate a commercial lease.
