How to Negotiate a Commercial Lease

igning a commercial lease is a big deal — it means a new physical home for your small business!

It’s important to carefully review and understand your commercial lease. Your commercial lease establishes the terms of your agreement with the property owner, covering monthly rent, renewals, and more. Here's how to negotiate a commercial lease to protect your business's resources.

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Preparing to negotiate a commercial lease

Like any business contract, a commercial lease deserves careful consideration. So before you start talking numbers with a landlord, take these essential steps.

Researching the local commercial real estate market

Commercial rents and lease expectations vary considerably by market. Do some preliminary research into what's available in your area, focusing on properties similar to what you need. For example, if you're looking for a retail space, narrow your search for retail properties.

The easiest place to start is on a commercial lease listing platform like Loopnet or PropertyShark. These platforms let you filter by property type, amenities, and more. Be sure to look for properties for lease, not for sale. For-sale listings target investors, not tenants.

Identifying your desired location and property features

You may not know precisely what you need when you first start researching, and that's okay. Narrow down your options by considering what you and your customers need from a location.

Location is your first consideration. Towns and cities enact zoning laws that define what types of activities are allowed in a particular area. For example, many municipalities won't allow someone to run a business from a residential building.

Many areas also restrict what kind of business you can have on a specific property. Some office locations won't allow retail space, and restaurants must abide by specific food service zoning laws. Ask your local government officials where your business can set up shop.

Then, consider how many square feet of space you need and what features are must-haves. Standard features in commercial lease spaces include the following:

• Meeting rooms
• Event spaces
• Private offices or cubicles
• Commercial or private kitchen space
• Parking areas

Know your minimum requirements and where you can give a little. For instance, maybe you need parking for client appointments, but you can deal with five spaces instead of 10.

Establishing a budget and understanding lease terms

Once you know what you want, you can decide what you'll pay for it. Review your business's financials and determine how much you can afford to pay per month. Novo's business banking solution makes it easier to crunch the numbers and understand your financial position.

According to marketplace data from ContractsCounsel, the average rent for a commercial lease was $680 per month in 2022. That said, actual numbers can vary considerably based on location, size, and features. Note that real estate rentals are often quoted in price-per-square-foot terms.

There are additional costs to consider as well. For example, some property owners make tenants responsible for utilities, maintenance, and repairs. As you set your budget, consider the total amount you can afford per month for all costs, including these.

Seeking legal advice and assistance

Commercial property owners have experience and, often, legal counsel. If you're entering the process with less experience, consider hiring a lawyer to help.

Find someone with experience negotiating for tenants who will set a rate you can afford. Talk to a few lawyers before making your decision, and remember to check their reviews online before you choose.

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Negotiating a commercial lease

Whether you hire an attorney or go it alone, the negotiation process will define the rest of your relationship with the property. Follow these steps to negotiate an agreement you can live with.

Communicating with the landlord or leasing agent

Unlike residential leases, which usually feature fixed terms and are difficult to change, commercial leases are almost always negotiable. Most commercial property owners or agents expect you to read the agreement and negotiate some of the terms.

You can handle the negotiations yourself or ask your lawyer to represent you. If you choose the latter, be ready to compensate the attorney for their time.

Identifying key lease terms to negotiate

Understand and consider negotiating these important lease terms before you make an offer.

• Term length: Most commercial leases last three to five years, but you can negotiate a shorter or longer term if necessary. For instance, if you're new to tenancy and aren't sure if this space will be right long-term, you might want a shorter lease.
• Rights to assign: This term lets you pass the premises and their associated financial obligations to another tenant. It's a valuable clause if you're not sure this is the location or property for you, but it might be challenging to negotiate with some landlords.
• Exclusivity: An exclusivity provision prohibits the landlord from leasing nearby space to a commercial business. Newer businesses can benefit significantly from exclusivity, especially in a busy area. However, you may have to compromise on other terms because it restricts a landlord's rental capacity.
• Expenses: Commercial leases include specific details regarding who is responsible for expenses. If a property owner asks you to carry utilities, insurance, or standard area maintenance costs, try to negotiate.
• Insurance: Some landlords require tenants to carry specific insurance products to cover liability. Ask a lawyer what is reasonable in your case and what you can adjust.

There may be other terms you need to negotiate, so read the lease document and suggest alternative terms if something doesn't work for you.

Making initial offers and counteroffers

Most commercial leases include a listing price, but it's common for potential tenants to suggest another number. Most commercial landlords allow room for negotiation. Some will even respond to your interest with a form requesting your counteroffer.

The offer phase may be quick or involve multiple offers and counter offers. It may take a few business days to hear back at each step.

Negotiating lease renewal options

Always hope for the best and have a plan for renewing your lease if you decide to stay. Renewal is essential if you have a location-dependent business, such as a restaurant or retail store, which could struggle to retain customers in a move.

If you have a renewal option, check the specifics. For example, some renewal clauses require a certain amount of notice or enable the landlord to raise your rent based on market value. You can negotiate these terms when you sign the initial lease or wait until closer to renewal time.

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Finalizing a commercial lease

Only a few steps are left once you've negotiated your commercial lease.

Reviewing the lease agreement

Before you sign the lease, read it over one final time in detail. If anything seems unclear, verify the details with your lawyer. Check with the landlord if you haven't hired a lawyer.

Finalizing lease terms and signing the lease

Signing a lease makes the terms final. Tie up loose ends and ensure you're comfortable with the entire agreement. Run it by your lawyer before putting your signature on the document.

Understanding tenant responsibilities and rights

When you've signed the agreement, you're officially a tenant. Pay rent on time and keep up with any other financial responsibilities, such as utility payments. Know what else you're responsible for according to the lease and ensure you fulfill all terms. Breaking any lease terms could cause termination or interfere with your renewal.

Your landlord also has responsibilities, most notably to keep the building suitable for business operations. Notify the landlord if any building issues interfere with your work, and keep an eye out for defects or damage that need fixing.

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Conclusion

Lease negotiation is one of the most critical ways small business owners speak up for themselves. Instead of viewing the process as "asking" for something, think of it as protecting your business assets.

View everything in the lease as negotiable, and don't be afraid to offer reasonable alternative terms. Your goal is to obtain as much value as possible for your money.

Finally, don't be afraid to invest in legal representation. It may increase your costs upfront, but a skilled real estate attorney can help you secure more attractive terms.

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