How to Negotiate a Commercial Lease

Last Updated on May 17, 2023 by

What is a Commercial Lease?

A commercial lease agreement is a legal document that outlines the terms and conditions of a rental agreement between a landlord and a tenant. Negotiating a commercial real estate lease can be a complex process, and with it being one of the biggest business expenses on the books, tenants need to ensure that they secure the best possible terms for their business.

Prepare for the Negotiation

Before approaching the negotiating table, it’s important for tenants to understand their business needs and identify any budgetary constraints. This will help them to determine the rental rate and lease term of the commercial property that is most suitable for their business.

Understand Your Business Needs: Consider the size and type of space your business requires, the location and accessibility of the property, and any specific features or amenities that are necessary for your business to operate effectively. Understand how this may affect your overall operating expenses and operating costs in the long-run.
Research the Market: Familiarize yourself with the current market conditions for commercial real estate in your desired location. Research rental rates, lease terms, and other incentives offered by landlords to determine a fair price for the property.
Review Lease Terms: Review the lease terms carefully before entering into negotiations. Pay close attention to important clauses such as rental rates, termination conditions, renewal options, tenant improvements, and rent abatement.
Identify Areas for Negotiation: Identify areas of the lease agreement that you would like to negotiate, such as rental rates or lease terms. Determine your ideal outcome for each area and prepare to present your arguments and counteroffers during the negotiation.
Know Your Lease Options: Understanding your lease options is a critical component of negotiating a commercial lease that meets your business needs. There are several lease options available, each with its own advantages and disadvantages. Here are some common lease options to consider:
1. Net Lease: In a net lease, the tenant is responsible for paying a base rent as well as some or all of the property’s operating expenses, such as property taxes, insurance, and maintenance. There are three types of net leases: a. Single Net Lease: Tenant pays rent plus property taxes. b. Double Net Lease: Tenant pays rent plus property taxes and insurance. c. Triple Net Lease: Tenant pays rent plus property taxes, insurance, and maintenance.
2. Gross Lease: In a gross lease, the landlord is responsible for paying all of the property’s operating expenses, and the tenant pays a fixed rent amount. The landlord includes the operating expenses in the rent, so the tenant knows exactly how much they will pay each month.
3. Modified Gross Lease: A modified gross lease is a combination of a net lease and a gross lease. The tenant and landlord agree on which operating expenses the tenant will be responsible for paying in addition to the fixed rent amount. Typically, the tenant is responsible for paying some, but not all, of the property’s operating expenses.
Determine Your Budget: Develop a budget for the lease agreement that considers the rental rate, lease term, security deposit, and any other fees associated with the lease. This will help you to determine what you can afford and what terms you can negotiate.
Prepare a List of Questions and Concerns: Before entering into negotiations, prepare a list of questions and concerns to clarify any uncertainties or ambiguities in the lease agreement.
Hire a Real Estate Attorney: Consider hiring a real estate attorney to represent you during lease negotiations. A real estate attorney can provide valuable advice, review lease clauses, and help you negotiate favorable terms.

Initiate the Negotiation

Once you’ve prepared for the negotiation, it’s time to initiate the process. Here are some tips for initiating a successful negotiation:

Meet with the Landlord or their Representative: Schedule a meeting with the landlord or their representative to discuss the lease agreement. This will allow you to ask questions, clarify any uncertainties, and provide an initial offer in person.
Ask Questions: Ask questions about the property, the lease agreement, and any incentives or features offered by the landlord. This will help you to determine whether the property meets your business needs and whether the lease terms are favorable.
Present Your Counteroffer or Proposed Terms: Once you’ve evaluated the lease agreement and understand your business needs and budget, present your counteroffer or proposed terms. This may include negotiation on the rental rate, lease term, security deposit, or other fees.
Be Prepared to Negotiate: Negotiation is a give-and-take process, and it’s important to be prepared to make concessions to reach a mutually beneficial agreement. Consider what terms are most important to your business and be prepared to negotiate on other points.

Key Negotiation Points to Consider

Rent and Lease Term: Tenants should negotiate a rental rate that is reasonable for their budget and reflects the market value of the property. They should also consider the lease term and any options for renewal or termination.
Lease Incentives: Landlords may offer incentives such as rent abatement, fewer tenant obligations, or tenant improvements to attract tenants. Tenants should consider these incentives and negotiate for any improvements or upgrades that are essential to their business.
Lease Renewal and Termination: Tenants should negotiate any early termination, renewal options, and exit clauses that may be included in the lease agreement. This will give them the flexibility to adjust to changing business needs.
Rent Escalations: Tenants should also consider any rent escalations that may be included in the lease agreement. They should negotiate for a cap on any increases to ensure that their rent remains affordable over time.
Free Rent Periods: A free rent period is a negotiated period of time during which the tenant is not required to pay rent, but is still permitted to use and occupy the leased space. Free rent periods are often used as an incentive to attract new tenants in a competitive leasing market.

When negotiating a free rent period, tenants should consider these two factors:
1. Length of the free rent period: The length of the free rent period can vary depending on the landlord’s preferences and the tenant’s needs. It’s important to negotiate a free rent period that provides enough time to set up your business, move into the vacant space, and begin generating revenue.
2. Rental rate: Some landlords may offer a lower rental rate for the lease term in exchange for a free rent period. Consider whether a lower rental rate for the entire lease term is more beneficial than a short-term free rent period.

Finalizing the Lease Agreement

Once negotiations are complete, tenants should review the lease document with a lawyer and negotiate any remaining concerns or issues. It’s important to have some form of legal counsel and ensure that all agreed-upon terms are included in the lease agreement before signing it. Tenants should also maintain a positive landlord-tenant relationship to ensure that any issues or concerns can be addressed in a timely and professional manner.

Conclusion

Negotiating a commercial lease means engaging in a multifaceted process, but tenants can secure the best possible terms for their business by preparing thoroughly and considering key negotiation points such as rental rate, lease term, lease incentives, renewal options, termination clauses, and rent escalations. By seeking professional advice and assistance and maintaining a positive landlord-tenant relationship, tenants can ensure that their business has the best possible start in their new location.