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Do you own a cute little boutique clothing store? Or perhaps you own a hipster coffee shop instead? Maybe even a gorgeous, boho craft store? Whatever type of shop you want to set up, one of the most crucial steps of starting out on your business journey is finding the perfect location.
This will not be easy, in fact, it will be quite a challenge thanks to all the factors you need to consider — finding the right space style and size in a location that is right for you and that fits your budget. Plus, you will probably be renting this space — do not worry, the majority of small businesses do this — so you will be in possession of a small business lease.
Negotiation during the process of finalizing your small business lease is vital to making sure you receive a competitive price and that you stay within your budget so you are not blown off course.
Not to mention that if you stay at your chosen location for multiple years, your landlord will probably try to raise your rent. To make this process as easy as possible, you will want to establish a positive relationship with him or her so your negotiation attempts have more chance of being accepted.
Before you start your negotiations, it is worth knowing the four main commercial lease types. This refers to how they are structured. These different forms they can take are:
With this one, you will pay for utilities and building tax, while your landlord pays maintenance, repairs and insurance fees.
The Net-Net lease structure means you will only be responsible for the utilities, building tax and insurance premiums and your landlord will cover maintenance and repairs.
Here, you are expected to pay for all building costs (taxes, utilities, maintenance, repairs and insurance premiums). However, any structural replacements or fixtures that need to happen are usually the responsibility of your landlord.
If this is the type you are signing then structural repairs and other expenses (taxes, insurance, common area maintenance, utilities) are split between you and your landlord. This is called base rent.
Keep in mind that if you are after a space in a shopping center, things like base rent and the structure of the lease are incredibly difficult to negotiate as it needs to remain fair for all. You need to focus on haggling perks and the little things that will ensure the lease is in your favor (which we will discuss later on in our rules) when it comes to malls.
Do not worry, regardless of whether you have never negotiated anything before or you have your own tried and tested methods, these ten rules will aid you in the successful negotiation of your small business lease.
Commercial real estate leases are far more detailed and complicated than residential ones. You should not go into it with the mindset that your landlord will be giving you a “standard contract” that you don’t have to pay much attention to. These commercial real estate lease contracts are scrutinized and meticulously put together by your landlord in order to protect themselves and increase their profits as much as possible.
This means that you will need to thoroughly look over the small business lease to ensure you do not miss a trick and can negotiate any adaptations you want to make to it.
Some of the changes you may want to ask for include late payment penalties, when your rent is due, how you are expected to pay it and lease break terms. Of course, bear in mind that it is unlikely to receive everything you ask for but, it is true what they say “if you don’t ask, you will never know”.
Do not forget the importance of educating yourself on the commercial real estate market before you go into negotiations with your landlord. You don’t need to be moving completely to familiarize yourself with the market, you will need this knowledge even when renewing your existing lease.
Some of the aspects you will want to know are:
If you are not sure where to find this information, check out a commercial real estate broker or have a look at the Commercial Real Estate Listing Service which will reveal all.
Making sure you are aware of these facts will let you know whether or not your landlord has the upper hand before you even step in to negotiate.
If rents are at their premium and lots are rare, you will probably have quite a hard time negotiating terms in your small business lease. However, if similar spaces are readily available, then you are blessed with lots more leverage.
The best practice is to hand your landlord real examples of the types of units that are currently available, along with their prices. This way, your landlord is going to be more receptive to any negotiations.
Have you had your small business lease for a number of years? Have you always paid rent on time? Have you kept within the building’s rules and maintained a suitable noise level throughout your time there? Well, if so, do not be timid about bringing this fact up as you negotiate. Trust us, landlords would much prefer to keep an excellent tenant but receive less rent than have to go through the hassle of finding a new one who may or may not be as reliable and trustworthy as you.
It is also a good idea to look for openings within your chosen building while you are gathering market knowledge. Sometimes, landlords will offer incentives for new tenants. This could include things like two months of free rent — do not be afraid to ask for this either, after all, “if you don’t ask, you don’t get”.
Even if you are signing a small business lease for a new unit and landlord, you can draw on your past renter behavior to stand you in good stead at negotiation times. Just make sure to hand them references from landlords you have had to prove your statements and improve your rent reduction chances.
As we have already mentioned, small business leases are meticulously written by the landlords as and when needed so they vary a vast amount as to what they choose to include within the cost.
You could be paying for repairs, maintenance, utilities, property taxes, security costs, insurance, janitorial services and a lot of other aspects on top of your rent. However, some landlords pay for all of this (or some, at least).
Make sure you understand who is paying for what and whether or not you are being charged variable costs. If you are indeed paying for things such as utilities (variable), attempt to haggle a cap on these charges so you won’t have to come face-to-face with a shocking figure one month.
Landlords will want you to sign a long-term small business lease as it secures you in that spot and they do not have to put time and effort into finding someone new to rent from them each year.
However, as a small business, you will benefit from a short-term lease agreement much like a short-term loan because it will allow you to have more flexibility. Oftentimes, you will find that the terms are better on long-term contracts but this can be your ace in the hole if you want to move to a larger space before your rental time is up. On the other hand, though, short-term ones can dramatically bump up the price every time it is up.
In order to find the perfect balance, negotiate a one or two year lease with a renewal option, as well as a capped amount that the annual rent can increase to.
Before you do any of this, however, make sure to look into your own business finances and try to predict how it will expand and increase as time goes on. This will stop you from signing a few-year lease on a big area that you do not need when you are just beginning your journey. Of course, you also don’t want to be signing a lease for something that only just fits your quickly growing company in!
The crux of it is: know your business’s profit and growth potential so you can search for the perfectly sized shop that comes with a lease time that suits you.
If your signed lease is up and within the contract you had an option to renew it, actually doing this just reinstates your pre-existing contract with the same terms. We advise you to not do this automatically and put some time aside to go over the market conditions that are happening right now, and the aspects you do not like about the small business lease you have at the moment. Once you have passed this hurdle, it may be necessary to negotiate an entirely new lease and that is okay, whatever makes the most sense!
Ensure that you know when your small business lease is due to renew so you can give yourself enough time before this happens to devise a list of changes that you want to see. If you make the mistake of rushing this, your negotiation attempts will not be effective as you won’t have a well put together argument.
Remember that you are not the only person (or people) in the building. The other tenants in your office block, shopping center or retail park should be on your mind when negotiating because, at the end of the day, they will be the success or downfall of your business.
You might want to negotiate an exclusivity clause. This means that your landlord will not be allowed to lease a competitor of yours an office or unit in the same building as you.
What defines a “direct competitor”? Well, this is where two (or more) companies provide services or products that are pretty much the same, meaning they are in the same market and looking to attract exactly the same target audience.
Another useful clause to barter is called a co-tenancy clause. This protects you should a key anchor tenant (like a big brand name that pulls in a steady, large flow of customers) move out of the property, causing your business to suffer as the clientele just won’t be there anymore. If this were to happen, the co-tenancy clause steps in, thus giving you the option to reduce your rent or even break your lease.
Negotiating your small business lease is an exciting time as you are filled with hope and joy that your business will grow and grow beyond your wildest dreams. Well, not to pop your bubble, but it is pretty vital that you have a plan should the worst scenario come to fruition.
Attempt to haggle for the allowance to sublease part or even all of your unit to an additional business. This saves you if your business does not do quite as well as you hoped and you find that you can’t afford the rent. Whoever moves in needs to be aware that it is a temporary arrangement, however.
Another really good idea is to make the renewal options of your small business lease transferable so if you ever sell your business on, the new owner can remain in the same space.
By now, you have probably realized the sheer hard work, expertise and skill that is necessary to negotiate a small business lease. Regardless of how skilled you are in generating normal business sales, you will probably need to hire a business attorney to look over your small business lease and do the negotiating for you.
It may come as no surprise that this professional will have a wealth of experience in dealing with this type of commercial contract and so, will be able to tell you in a timely manner whether anything in the terms may be an issue, or if there is anything untoward about it.
Alongside this, they can draw upon their knowledge to inform you of what counter-terms will be the best for you and how to ask for them in an appropriate way.
Everybody loves perks and they can be a real upside to small business leases.
Where bartering with a commercial landlord over base rent and the structure of the lease may be difficult, they will usually offer some ‘advantages’ that you can attempt to get for free.
Some of the perks you may be able to haggle for are:
It is important that you do not settle because the landlord makes it feel like none of the terms can be negotiated on. This is a tactic — bartering is a game after all.
Aside from what we have already spoken about, there are other factors to look out for, such as:
Negotiating and haggling may not be your preferred choice of activity, however, it is essential for both cost and your success as a business.
When you find the perfect place to set up shop, do not sign the paperwork until you have scrutinized the contract yourself and hired a legal professional to do it too. Remember that the more money you save on your small business lease, the more cash you will have to flood into other factors of your business such as advertising and expansion.
