How to Negotiate Good Lease Terms
Last November, I wrote an article entitled, Commercial Leases: Avoid Getting Screwed, which identified three important aspects of a commercial lease: Location, Rent and Lease Terms. In this article, I talk specifically about Good Lease Terms, and give you some understanding of the various lease terms to think about when considering or negotiating a commercial lease.
Unfortunately for you, the small business owner, negotiating leases or dealing with landlord/tenant issues is simply not your cup of tea. If you’re lucky, you only need to worry about this once every three or so years; while your landlord is very seasoned and experienced at dealing with landlord/tenant issues, and already has superior knowledge about the premises you’re considering.
Brokers are NOT Attorneys
If you’re using a broker, please remember that brokers are only good at one thing: matchmaking (i.e. finding you space). They are NOT attorneys. They are NOT there to represent your best interest, despite what they may say and despite how nice they are. Brokers make their money on one thing: Closing deals. That’s it. Do NOT rely on your broker to help negotiate your commercial lease – they have absolutely no accountability in law to their performance, and because they get paid when you sign, that is their main priority.
Do NOT rely on your broker to help negotiate your commercial lease
With that said, I’m sorry to say that unless you are an attorney who is experienced in commercial business leases, you will not be able to negotiate a good commercial lease. This is the one time you really need to bite the bullet, and find a good business attorney who will review your lease. If you don’t have an attorney, consider L4SB’s flat-rate contract review service. Otherwise, do a google search and find a good local attorney in your area, who is familiar with the neighborhood you are considering.
There Are Many Terms to Negotiate in a Commercial Lease
If you are unwilling to hire an attorney (I get it … you’re a small business owner and used to doing everything yourself), then consider these issues when negotiating your lease. Please note that these issues are neither exhaustive nor complete, nor can I promise they will cover all situations (which is why I recommend you hire an attorney):
(a) Your Name. If you have a business entity, make sure the actual full legal name of your business entity is listed as the lessee, and not your personal name. This should be non-negotiable.
(b) Term. Longer-terms yield lower rents, but if you’re a startup business, remember that over 95% of startup businesses fail and while you never want to assume your business will fail, don’t be overly optimistic and lock yourself into a long-term lease unless you’re absolutely sure of the long-term viability of your business. For example, if you provide a service, what happens if you get sick or incapacitated or worse?
(c) Renewal. Make sure you have an easy option to renew, and your rent is reflected in your option to renew. Don’t let the landlord put a long-term notice requirement to exercise your option. 90 days is too long. 30 days would be ideal. 60 days is an acceptable compromise. (Then, don’t forget to put that in your calendar, well in advance, so you don’t make the mistake of not renewing on time).
(d) Rent Increases. Be careful, because some landlords will give you a lower-rent the first year, then jack stuff up in subsequent years or in renewal terms. Make sure you factor these rent increases in your business proforma (or financial forecasts), and make sure you can afford them using pessimistic projections in your proforma.
(e) Obtaining Consent. Are they requiring “landlord consent“ over critical items that you can’t have your landlord holding over your head? (i.e. Signage, pricing, paint colors, wall repairs, carpet replacement, etc?) Anything that requires consent of the landlord should be followed with “said consent shall not be unreasonably withheld or delayed.” You don’t want the landlord tying up you or your business, because they have veto over basic critical items of your business. Don’t trust landlords, when they say “we never say no.”
(f) Condition of Premises and Repairs.
- If language says that you’re accepting the premises in good order and condition, make sure you have had it professional inspected, and especially those expensive elements you may be responsible for (i.e. pipes, HVAC, roof, etc).
- Water damage. Don’t take responsibility for such damage, especially if it’s not in your control (i.e. roof leaks).
- Make sure the landlord is responsible for maintenance and repairs to those items outside your control (i.e. shared roof, shared HVAC, foundation, parking lot, common areas, etc), and the landlord should be responsible for damage associated with its failure to repair and/or maintain those items under their control.
- Ask yourself, what could happen to something under the landlord’s control that could ruin your business? What happens if there’s no heat in the winter? What happens if there’s no water? What happens if a loud, noisy, smelly business opens up next door? What happens if it’s hard for your customers to find parking?
(g) Liabilities. Blanket waivers of liability can limit your ability to hold the landlord accountable. Therefore, make sure you’re not waiving liability for the landlord for his breaches to the lease, or failure to repair or maintain the premises.
(h) Ownership of Alterations, Additions and Improvements. Some landlords will try to take ownership of anything you do within the premises that is “affixed.” This means the landlord can take ownership of mirrors, special ceiling treatments, ceiling fans, special flooring you may have installed, etc. Worse, the landlord will not fix these items if they go into disrepair, but the landlord will try to keep these items if you relocate away and potentially prevent you from replacing or updating items to meet the needs of your business (i.e. see “Obtaining Consent” above). Try to think a couple of steps ahead.
(i) Right of Entry. The landlord’s access to your space should be reasonable, don’t you think? You should be given notice when in non-emergency situations. Make sure your landlord enters your premises in “the least obtrusive manner possible.”
(j) Holding Over. “Holding Over” is a fancy legal term to mean that the lease has ended, but you’re still in the space. If there is no “holding over” provision in your lease, you are at the mercy of your landlord. Make sure the lease contains a holding over paragraph, and gives you the right to hold over on a month-to-month basis. Make sure any increase in rent is appropriate and competitive for your market.
(k) Unavailability of Premises for Some Reason (i.e. Destruction, fire, construction, etc). Ask yourself, will your business survive if you cannot open the doors or your customers cannot reach you? Should you be “stuck there,” just because the landlord wants to have the place repaired, after a fire or some other tragedy that could take months to fix?
(l) Signs. Make sure you’re protected against the landlord’s refusal to permit a sign (See “Obtaining Consent” above), and don’t let the landlord put signs in your place, even at the end of the lease, unless you give your consent (after all, you’re still paying for the place).
(m) Termination and Remedies. Is it all about the landlord, or is it fair? Don’t allow “removal or eviction by force,” instead make the landlord take you to court. Make sure reletting reimbursement is fair and balanced.
(n) Broker fee. Is there a broker? Make sure they are getting paid on the lease, and that the landlord is responsible for that broker fee. (Note that if you do have a broker, you’re going to find it difficult to get one-year terms, because the broker gets paid a percentage of the total lease value).
(o) Personal Guarantees. Don’t give away your rights, and don’t let the landlord enforce a personal guarantee without the necessity of notice of nonpayment, nonperformance or non-observance. Don’t let the landlord file a claim against you, without FIRST exhausting all remedies as against the business.
Don’t fool yourself into thinking an attorney cannot help you here
Commercial Leases: Put it in Writing
If the landlord won’t budge on a particular issue, it’s because the landlord knows that particular issue is likely to occur. Never, ever accept a landlords “promise” to negotiate, be fair, do the right thing, etc, unless the landlord is willing to put it in the lease. When it comes to a commercial lease, the only real thing that matters is what is written down. The spoken word is absolutely meaningless.
Please note that the above list is not exhaustive, and there are many other issues to consider when negotiating a commercial lease. Don’t fool yourself into thinking an attorney cannot help you here – one of the most important things you as a small business owner can do, is make prudent business decisions – and hiring an attorney to help you negotiate your commercial business lease is a prudent business decision.