The process of finding a suitable venue for your developing enterprise is invigorating, but the signing of a commercial lease will definitely be one of the major obligations in your business life. A lease that has been properly negotiated can be a boost to your company’s growth and give your company financial security, while a lease that has been badly structured can exhaust your resources and impose limitations on your operations. It is very important to know how to negotiate a fair, flexible, and sustainable lease as your company’s rights and interests are at stake.
Here’s a step-by-step guide to help you navigate the process and secure a commercial lease that truly works for your company’s growth.
1. Assess Your Business Needs Before Negotiating
Before the negotiations, it is very important to take time to evaluate your business requirements. First, decide how much space you need at present and how much growth you are expecting in the next few years. Also consider the type of work environment that fits your business model, the amount of foot traffic you intend to generate (if any), and the distance to your customers or suppliers.
In addition to that, it is very important to work out your budget. A lot of business owners tend to think about only the rent amount payable every month; however, there are other costs that come with a lease, such as maintenance, insurance, utilities, and property taxes. Being clear about your financial resources will give you the confidence to bargain.
If you expect to grow, then look for places that can accommodate growth or versatile use. Probably renting a little bit bigger office or retail place might help you later in not having to incur the cost and disruption of moving.
2. Research the Market
Market research gives you leverage. It is wise to do your market research before talking to a landlord or broker about the commercial property you intend to rent. Find out the current rental rates, tenant incentives, and vacancy trends for similar spaces.
If you find that comparable spaces are renting for less or that the market is slow, you will be in a very good position to negotiate with the landlord. Stay updated on the current rental prices, tenant perks, and the vacancy rate.
If you find out that the rentals for comparable spaces are lower or that the market is sluggish, you will definitely have tougher evidence to argue for the terms that are in your favor. Nonetheless, in the case of a competitive market with few vacancies, putting yourself in your landlord’s shoes by understanding the situation will allow you to determine your expectations accurately.
It is also best to hire a commercial real estate broker who exclusively deals with tenant representation when looking. One of their invaluable services is to supply you with data on local market trends and even help locate properties that would meet your needs.
3. Key Lease Terms Understanding
Do not just sign – rather, before that, make sure you comprehend every aspect of the commercial lease agreement. Below are some key clauses whose related issues you should consider very carefully:
Lease Type
You will first decide if it’s a gross lease, a net lease, or a modified gross lease. The lease types explain who pays the expenses arising from the property, e.g., taxes, insurance, and maintenance.
Rent Escalation
Find out the method of rent increase over time. Although yearly rent hikes are the norm, you can still have the rate fall or fixed prices for the management of future costs as part of the bargain.
Lease Duration
Holding on for a long time might be a source of stability, but it can also trap you if the needs of your business change. A shorter lease with the option to renew is more expensive than a longer lease.
Use Clause
The actual business activities that are permitted on the premises are defined by this clause. So, make sure it matches your business activities, and keep the option open for business diversification.
Assignment and Subletting
The terms of the clause will specify whether you can assign your lease or rent out the space if your company moves or decreases.
Maintenance and Repairs
It is important to know who will be doing the upkeep concerning the HVAC systems, plumbing, and other building components.
The understanding of these terms gives you the power to bargain with the landlord for adjustments that will fit the business strategy.
4. Negotiate for Flexibility
Your company might have to shift gears quicker than you anticipated, thus having a lease with flexibility is something that will be worth the price. Try to negotiate for:
Renewal options, along with the shorter first lease of three instead of five years.
Rights of expansion, wherein you will be given priority if the space next door is opened.
Subleasing or assignment rights so that you can either move or share the space with another tenant.
You may also ask for an early termination clause that would enable you to get out of the lease under certain conditions, like sales dropping lower than expected or the company having to relocate. Not every landlord will accept this, but it’s definitely a point for discussion.
5. Ask for Tenant Improvements and Incentives
To facilitate tenants’ space needs customization, landlords usually provide Tenant Improvement (TI) allowances. The money can be for redoing the whole space, putting up a sign, or upgrading the existing one. Just make it clear whether the landlord is going to directly cover the cost of the improvements or if he’s going to reimburse you after the completion of the work.
It is also possible to barter rent-free periods or reduced rent for the time of your move-in or renovation. Considering that such incentives can significantly decrease your initial expenses, you will have more space to breathe in your business area until you are fully established.
6. Review Hidden Costs
One of the biggest mistakes that tenants make is not considering extra expenses along with rent. A commercial rent lease may cover property tax, maintenance, parking, and upkeeping of common areas in addition to rent.
Ask for a thorough description of CAM (common area maintenance) fees and whether these are fixed or adjustable. If the landlord is in charge of utilities or cleaning, check whether you will be allowed to provide your own vendor for efficiency in cost, or if you will have to take their service.
It is also prudent to confirm how costs are allocated among the tenants. For example, if your business occupies a very small part of the building that has several other tenants, make sure that you are not disproportionately paying for the larger tenants’ expenses indirectly.
7. Consult Legal and Financial Experts
Even seasoned entrepreneurs can overlook things in a commercial lease. A real estate lawyer will be your best ally in avoiding expensive surprises if he/she reviews the deal with you. He/she will interpret your rights, point out the bad clauses, and also suggest rewrites.
A financial counselor can help you, too, in calculating the lease impact on your cash flow and long-term goals. For businesses to grow, every dollar is essential, and professional help guarantees that your decision will be financially sound.
8. Build a Positive Relationship with the Landlord
Negotiation is all about getting good conditions; however, it is also very important to keep a respectful and cooperative relationship with the landlord. A friendly relationship can help with the process of improvements, renewals, or solving problems in the future.
Be clear in your communication, keep it professional, and consider the discussions as a collaboration. A landlord who sees you as a trustworthy tenant may be more inclined to provide concessions or give you more leeway.
9. Plan for the Future
Your business is going to change, and so will your requirements for space. Before you sign the lease, think about how the lease will be in line with your company’s growth trajectory.
Questions to consider:
- If you want to stay, are you able to easily renew the lease?
- What will happen if you want to expand, downsize, or move?
A carefully drafted lease will not only be a good fit for your current operations but also help to ensure that you grow sustainably.
Final thoughts
One of the most crucial steps in the process of expanding your business is securing a commercial lease. You can get a lease that works for you now and in the future if you know what you need, have looked into the market, and have carefully read all the terms.
It would be better for you to take help and guidance from a professional instead of rushing about it. The right lease will give your business the security, flexibility, and peace of mind it needs to grow in the years to come.
Also Read: Why Commercial Buildings Need Custom Security Installations
