How to Successfully Negotiate a Commercial Lease Agreement with a Landlord

Introduction to Commercial Leases

A commercial lease is one of the most important agreements a business owner will sign, as it determines where and how your business operates. Unlike residential leases, a commercial lease agreement is tailored to the unique needs of commercial tenants and can have a significant impact on your business’s financial health. Before signing any proposed lease, it is essential to carefully review all terms and understand the different types of leases available. Common options include a net lease, where tenants pay a portion of property expenses in addition to rent; a gross rent lease, where most costs are included in the rent; and a percentage rent lease, where rent is based on a percentage of your business’s sales. Each lease type comes with its own set of costs and responsibilities, so it is crucial to negotiate terms that align with your business goals and budget. By taking the time to understand your commercial lease and working with your landlord, you can secure a space that supports your business’s success.

Assessing Business Needs

Before you begin to negotiate a commercial lease, it is vital to assess your business needs to ensure the space and lease terms are the right fit. Start by evaluating your company’s current operations and future growth plans—how much space do you need now, and will you need more in the future? Consider the ideal location for your business, taking into account factors like customer accessibility, parking, and proximity to other businesses that may drive foot traffic. Amenities such as janitorial services can also add value and convenience. Establish a clear budget and determine the maximum monthly rent payment your business can comfortably afford, factoring in all potential rent payments and additional costs. By understanding your business needs upfront, you will be better equipped to negotiate a lease agreement that supports your operations, helps control costs, and positions your business for long-term growth.

Understanding Commercial Real Estate

Navigating the world of commercial real estate means understanding the different types of properties and lease structures available. Whether you are looking for office space, a retail storefront, or an industrial facility, each property type comes with its own set of considerations. For example, a triple net lease (NNN) typically requires tenants to pay property taxes, insurance, and maintenance costs on top of the base rent, making it important to budget for these additional expenses. In contrast, a gross lease often includes these costs in the monthly rent payment, simplifying budgeting but potentially resulting in a higher base rent. Lease duration, rent payment schedules, and specific lease restrictions can all impact your total costs and operational flexibility. By familiarizing yourself with key commercial real estate terms and understanding how different lease structures affect your responsibilities, you will be better prepared for lease negotiation and can secure better terms that align with your business’s needs.

Everything Is Negotiable

“Name me one thing in this world that isn’t negotiable.” – Walter White, Breaking Bad

While this may not be technically true—as surely a cashier at McDonald’s would be quite surprised if you tried to talk down the price of a Big Mac—it is a good mantra to have when negotiating terms of a commercial lease. For example, many new business owners are surprised to learn that one can not only negotiate certain terms out of the lease, but one can also work other terms into the lease. Lease options, such as renewal or expansion options, are a common example of negotiable terms that can provide valuable flexibility for tenants. Therefore, keep this in mind when discussing particular lease terms with your potential landlord.

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. It is important to evaluate your company's current needs and circumstances before deciding on the appropriate lease length. For example, if this is your first venture, and it is not a franchise or other well-known store, it is typically best to negotiate a shorter lease term. While landlords generally want to sign a tenant for a long lease term, as they do not like spending capital finding new tenants, it is sometimes in their best interest to work with such a tenant to create a manageable lease.

When considering future growth, think about whether your business may need more space as it expands, which could influence your decision on lease length. On the other hand, if you as a tenant are contributing to renovating the space, you will want a longer lease term so you can amortize the money spent. Similarly, many standard leases contain clauses that require any and all permanent fixtures to remain on the premises after the lease has expired. This is certainly an area of the lease you will want to negotiate if you spent the time and money on ceiling lights, certain affixed furniture, and the like.

Additionally, after reviewing extension options, pay close attention to the renewal conditions in your lease. It is important to review and negotiate these renewal conditions to ensure they align with your business's future plans and provide flexibility or incentives as your needs change.

Does this seem a bit unfair? In short, it somewhat is. But take a step back and think why this would be a standard clause of a retail lease. Well, it is not because the landlord is greedy and wants to hoard all of your belongings. Rather, it is due to the fact that if you have a vested financial interest in the space, you are less likely to either (a) default or (b) leave the shopping center for one of the various competitors of the landlord. Having said that, this logic does not make it non-negotiable. Therefore, if you are financially contributing to the space, you need to make sure there is an equitable way to deal with those improvements once the lease has expired.

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 technical 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, your family, 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 typically have several standard lease forms that they use in different scenarios containing fine print/boiler plate language that is purposefully 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 a “sixth-sense” feeling for where the landlord stands on many negotiable areas. It is highly recommended to consult a commercial lawyer to review the lease agreement and help you navigate complex terms, ensuring you avoid costly mistakes.

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.

Important and Often Overlooked Lease Provisions

As mentioned above, there are a few terms and clauses that every tenant needs to understand before entering into a lease.

First, a relocation right is an option given to the landlord to move the tenant’s business to another space in the shopping center if certain conditions are met. While this may not seem so bad, it can be devastating to some. Take, for example, a tenant whose business is located in a space that fronts a busy boulevard. The ability to be seen and recognized is a premium element in commercial leasing, and a relocation right can take that benefit away from you in the blink of an eye. The following paragraph is an example of a typical relocation clause.

If for any reason, in Landlord’s sole discretion, Landlord notifies Tenant in writing that Landlord wishes to relocate Tenant from the Premises to other space within the Shopping Center, Tenant shall, within [thirty (30)] days after receipt of Landlord’s notice, vacate the Premises and relocate all of Tenant’s trade fixtures, equipment, and inventory to the new premises designated by Landlord. Tenant’s reasonable and necessary expenses for moving such trade fixtures, equipment, and inventory shall be reimbursed by Landlord within thirty (30) days of Landlord’s receipt of invoices for such moving expenses. Landlord shall pay for the completion of interior improvements in the new premises substantially similar to those paid for by Landlord pursuant to this Lease in the Premises. All other costs of remodeling, outfitting, and furnishing the new premises shall be borne by Tenant. Tenant shall arrange for the transfer of all utilities to the new Premises. Tenant shall execute and deliver such further documentation as Landlord may prepare to memorialize the same.

As you can see, in order to effectuate the clause above, the landlord must pay for most reasonable and actual costs associated with the move. However, here the tenant will bear the cost for remodeling the new space. This is a perfect example of a standard lease leaning in the landlord’s favor and how a hidden term can have a serious effect on the tenant.

Second, a “tenant exclusive” clause is a lease provision that limits the use of a tenant’s business. For example, if you plan to operate a gym in the premises, you may not be allowed to sell protein shakes or smoothies—or at the very least somewhat limited in doing so. The reason for this prevention is because another tenant in the shopping center—maybe a smoothie shop—negotiated such a clause in its lease in order to limit competition. Having said that, you may, and probably should, negotiate a tenant exclusive clause to protect your business. Additionally, consider the presence of other tenants in the building and how their access to shared spaces or amenities might impact your business operations or customer experience.

Third, there are often additional fees tucked into inconspicuous areas of the lease. Such charges often show up on a tenant’s monthly statement and leave an undiscerning business owner paying fees he or she should have immediately cut from the lease.

Maintenance and Repair Clauses

While residential leasing often places the burden of maintenance and upkeep on the shoulders of the landlord, commercial leases are different. Just because the landlord owns the building, it would make sense to believe that they are responsible for repairs and upkeep, but this is not always the case.

Commercial leases vary in their approach to this. In a double net lease, the tenant may be responsible for property taxes and insurance in addition to rent, while a modified gross lease may include some but not all operating expenses, making it important to clarify these terms in the lease. Some stipulate that the tenant is responsible for all property upkeep and repairs, while others specify that the tenant is responsible for systems such as the air conditioning, plumbing, etc. Check your lease—in addition to stating who is responsible for what, it may also contain dollar limits on how much the tenant must pay for maintenance and repair. An attorney can help clarify your legal rights.

What Is Common Area Maintenance?

Common area maintenance, also known as “CAM,” refers to the additional money a tenant pays over and above the base rent. CAM charges cover certain expenses that the landlord incurs to manage common areas. “What is a common area?” you may ask. That is determined lease by lease, but it typically includes areas such as the parking lot, sidewalk, green areas, etc. Therefore, CAM charges cover, among others:

• snow removal,

• landscaping, and

• repaving.

CAM charges can significantly affect your total monthly payments, as they are added to the base rent and may include other fees, making it important to understand the full scope of your monthly payment obligations.

Common area maintenance is usually charged in proportion to a tenant’s square footage and is typically an area that landlords do not like to negotiate on. The reason for this resistance is because landlords like consistency, especially with respect to cash flow. It creates additional work for the landlord if some tenants are paying for CAM and some are not.

However, one frequent way to cater to the landlord’s love for consistency is to negotiate a flat fee that increases at 2–3% annually. When negotiating, be sure to clarify and include provisions for future increases in CAM charges to avoid unexpected costs. If the landlord uses a method that charges its tenants retroactively according to the actual CAM costs it incurred, then you should agree to this but also require a cap on the amount CAM charges can increase year over year.

The Tenant Improvement Allowance

If negotiated properly, a commercial lease can be a significant tool for a retail 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, fixtures, space re-configuration, etc. 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. In order to do so, know that requesting a TIA is frequently done in retail leases—so don’t be afraid to ask for one. Sometimes, tenants can negotiate for lower rent in exchange for making their own improvements, so consider this option during your commercial lease negotiation. 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?

When determining the amount of TIA, it is important to compare the improvement allowances and terms offered by other properties in the area to ensure you are getting a competitive deal.

However, when seeking a TIA keep in mind the old adage: “There’s no such thing as a free lunch.” In our case, just because the landlord is contributing actual money to your build out does not mean that you will be getting it free and clear. There is always, always, always, a kicker. These “kickers” usually come in the form of either increased landlord control or the previously mentioned fact that most leases grant ownership to the landlord in any “permanent fixtures and improvements.”

Moreover, by making an up-front cash commitment in the form of a tenant improvement allowance to the tenant, the landlord has a real interest in the tenant’s opening, also known as the “commencement date.”

Understanding Lease Restrictions

Commercial leases often include various restrictions that can affect how your business operates within the space. These lease terms may limit signage, dictate hours of operation, or restrict the types of activities allowed on the premises. It is essential to thoroughly review the lease agreement to identify any restrictions that could impact your business’s day-to-day operations or future plans. Pay close attention to clauses regarding subleasing or assigning the lease, as these can affect your flexibility if your business needs change. Additionally, consider who is responsible for costs such as snow removal, utilities, and ongoing maintenance—these expenses can add up and should be factored into your overall budget. By understanding and negotiating these lease restrictions, you can secure better terms, minimize operational risks, and ensure your commercial lease supports your business’s long-term success.

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