The terms agreed upon in a commercial lease can have serious ramifications for a business. Without a careful review and negotiation of these terms, businesses can be saddled with hidden costs and onerous clauses that can affect their profitability in the long run. This is especially important to keep in mind, as commercial leases submitted to prospective tenants are typically drafted by the landlord and will be weighted in their favour.
Negotiating commercial real estate for lease can be a complex process, but one that a business needs to undertake to protect its interests. If you’re in the process of choosing the right commercial space for your business, this article will provide practical tips to help you navigate the negotiation table to achieve favourable lease terms that align with your business goals and financial interests.
Review Your Requirements
Before you begin negotiations, conduct a thorough review of your business requirements. Consider matters such as the amount of space you need, your rental budget, and the length of time you will need to occupy the space, taking into account any future plans for business expansion. This will allow you to negotiate these terms effectively.
For example, if your business is new, you may need to negotiate the duration of the lease to offer you greater flexibility in terms of your notice period and ability to vacate the premises. Here, a short-term lease with the option to renew the length of the lease may be best. If, on the other hand, you require commercial premises that offer long-term security and a place to expand your operations in the future, a long-term lease will be more suitable.
Negotiate Repairs and Improvements
Before moving in, businesses commonly need to renovate commercial premises to suit their needs. Check that the lease allows for such modifications and includes provisions for potential reimbursement from the landlord in the event of lease termination, ensuring your financial investment is protected.
Before signing the lease, check your repair obligations and negotiate if necessary. For instance, the lease may place full responsibility on the tenant for all repair work to the interior and exterior of the building. There may also be an obligation for the tenant to restore the premises to a better condition than it was when the tenant took over. These terms should be negotiated to place responsibility on the landlord for all repairs and general maintenance to the exterior structure of the building, and interior repairs should be restricted to returning the premises to the state they were in when you moved in.
It is also worth having the property independently surveyed before finalising the lease. This will provide an indication of potential repair costs that may arise over the duration of the lease. This point can then be negotiated with the landlord to establish fair terms and responsibilities regarding these anticipated costs.
Be Clear on the Costs
Carefully review any incidental costs beyond the base rent that you may be required to pay under the terms of the lease. For example, the upkeep and maintenance of common areas or legal and administrative costs incurred by the landlord. Be clear on the details of each incidental cost and seek to reach an agreement that is as favourable as possible.
These terms can all be negotiated to ensure each party covers their own costs and an outcome is achieved where incidental costs may be shared with the landlord, or caps or limits agreed on any annual increases to provide your business with cost predictability over the lease term. The services of a commercial real estate lawyer can help you in your negotiations, ensuring you secure favourable terms that can benefit your business.
It is always worth asking for certain concessions or inducements when looking to lease a commercial space, especially one that has been on the market for some time. This might include negotiating rent concessions or a rent-free period at the beginning of the lease term. This is something landlords commonly offer as an incentive for tenants, especially when they need time to set up their business, make necessary improvements, or wait for construction to be completed.
If the premises need modifying before they can be used, you can ask for financial assistance from the landlord to cover the cost of customising or improving the leased space to meet your business needs. Other concessions that may be negotiated include terms such as:
- Utilities: Negotiating that the landlord covers all or part of the utility costs for the property.
- Moving expenses: asking the landlord to contribute towards moving expenses.
- Security deposit: Negotiate a lower security deposit to reduce your upfront costs.
- Free Parking: Requesting free or reduced-cost parking spaces for your employees or customers.
It is common practise for landlords to offer certain inducements during commercial lease negotiations, especially when they see the long-term value offered by a prospective tenant.
To give your business the best chance of success, it’s important to ward off any competition. This can be achieved by negotiating a non-compete clause, which may prohibit the landlord from leasing out a commercial space in the same location to any potential competitors, or a clause that offers your business exclusive rights to offer certain products or services within the leased space for a certain period (ideally the duration of its term).
If such favourable terms cannot be offered due to the nature of the landlord’s business, you may request terms that require the landlord to seek your consent before leasing out premises in the same building to a competing business.
The lease will set out certain situations where the landlord can legally terminate the lease before it expires. It is essential to carefully review the terms that constitute a default by the tenant and warrant early termination of the lease.
The termination conditions may need to be negotiated to ensure fairer terms, such as the option for the tenant to remedy a default within a certain period, and the negotiation of any fees or penalties (should the tenant decide to terminate the lease prematurely).
By engaging in negotiations with the landlord, you can work towards an outcome that not only safeguards your business interests but also ensures a positive and productive tenure throughout your lease agreement.