Wondering how to negotiate a commercial lease?
Get ready, we’ll drop some game-changing tips that will give you the power to negotiate a favorable lease.
When going into a commercial office to negotiate a lease, the odds are often stacked against you because the landlord knows a lot about the process. After all, a commercial lease agreement is prepared by the landlord to favor the landlord.
Hence, the landlord may set hefty monthly rent and even include critical terms to favor the management of their properties.
However, you can negotiate nearly all the terms in your lease.
Knowing how to negotiate a commercial lease can put your business in a position to succeed. In this post, we’ll share some tips to help you negotiate a favorable lease. But first, a primer on commercial leases.
What Is a Commercial Lease?
A commercial lease is a legally binding contract between a lessor and a lessee to use an office, an industrial property, a warehouse, or a similar facility for business-related purposes.
In layman’s terms, a commercial lease is a contract between a business tenant and a landlord for the rental of property. For a commercial lease to be legally binding, it must contain the essential elements of a contract outlined below.
- Offer : An expression of willingness to enter into a contract
- Acceptance : An unequivocal statement by the lessee agreeing to the offer
- Consideration : The price asked by the lessor in exchange for the promise
- Intent : Intention to create a legal contract
A commercial real estate lease, like an office space lease , will become binding as soon it’s accepted and signed by the lessee.
Here’s an article about how to lease an office space that’s worth checking out.
Commercial Leases vs. Residential Leases
There are several notable differences between commercial and residential leases. For instance, commercial leases offer:
Nearly all of the commercial lease terms are negotiable.
Business tenants can negotiate many lease terms, including rent amount, allowable improvements, etc., which will not always be the case with residential leases.
Commercial leases typically last from three to five years , creating a long-term relationship between the landlord and the tenant. In contrast, most residential leases are for one year.
Commercial leases have varied terms because business needs vary from tenant to tenant. Hence, no standard form can be used for commercial leases.
On the other hand, residential leases can be accommodated in a standard form because, in most cases, tenant requirements tend to be similar.
Fewer Legal Protection
Commercial leases have less legal protection compared to residential leases. That’s because consumer laws that apply to residential lease agreements don’t apply to commercial leases.
If you have questions about this, please reference here .
Types of Commercial Leases
There are five different types of commercial leases.
1. Net Lease
In a net lease , tenants usually pay for the base rent plus one of the following:
- Property taxes
In most cases, you pay the base rent plus the property taxes. The landlord pays for maintenance, repairs, and other incidental expenses.
2. Double Net Lease
In a double net lease, tenants pay a base rent, a share of the property taxes, utilities, insurance premiums, and janitorial services for the building. The landlord is responsible for structural repairs and maintenance.
3. Triple Net Lease
In a triple net lease , tenants are responsible for all the operating costs related to the property, except for structural repairs. You’ll be responsible for the property taxes, utilities, maintenance, insurance premiums, etc.
A triple net lease is the most favorable for the landlord because the tenant covers all the costs associated with the operations of the building.
4. Percentage Lease
This type of lease is common in malls and other multi-tenant retail locations.
In a percentage lease, the tenant pays base rent and a percentage of their monthly sales over a certain minimum. This arrangement allows the tenant to benefit from a reduced base rent in exchange for sharing their upside with the landlord.
5. Gross Rent Lease
In a gross rent lease, the tenant and landlord equally split the costs related to the property. You pay a specified amount to the landlord, covering rent and all incidentals, including taxes and structural repairs.
Here’s an article about retail leases that should give you more insights into the various types of commercial leases available today.
How to Negotiate a Commercial Lease: Top 5 Tips
While some commercial leases may be non-negotiable, most landlords allow some “wiggle room” for negotiation. Here are some tips to help you negotiate a commercial lease.
1. Arm Yourself with Knowledge
When it comes to negotiating a business lease, knowledge is power.
First, you’ll need to garner enough knowledge of the commercial real estate market in your area. Do your homework well and get all the information about the costs of comparable properties in your area so you can negotiate a fair price.
You’ll also want to talk to other local businesses to find out about security in the neighborhood and any other issues that could impact your company. This information can form the basis for your price negotiations.
2. Think about Going Long-Term
Tenants who’re willing to sign a long-term lease gain leverage at the negotiation table.
If a landlord knows that a tenant intends to occupy a commercial space for a long-time, they’re more likely to agree to make concessions. Landlords don’t want to negotiate every year. Hence, they’re likely to agree to lower costs if you opt to go long-term.
3. Review Termination Conditions
Examine the lease agreement closely to understand the circumstances under which a party may terminate the lease. This is typically found in a termination clause .
For example, what happens if the landlord sells the building? Can you be kicked out of the property for missing a month’s rent payment? How can you break the lease if your business grows and you want to move to a larger space?
Negotiating an ‘early termination right’ can allow you to end the lease before the lease term ends. Failure to negotiate an early termination may subject you to contractual charges should things go south and you have no other option but to terminate the lease.
4. Ask for Favorable Clauses
Ask for changes to the lease that will work to your business’s advantage.
For example, you could ask the landlord to include a clause that will allow you to sublease the space. Such a clause can come in handy should you choose to relocate or close the business due to unavoidable circumstances.
You could also negotiate for the landlord to renovate the building before you move in or provide some parking space for your employees.
5. Have a Lawyer or a Tenant Rep Broker by Your Side
It’s critical to involve a lawyer in your commercial lease negotiations.
Real estate lawyers who understand commercial leases can help you negotiate favorable terms and save you costs down the line.
Alternatively, you could get a tenant rep broker.
A tenant rep broker can give you insights into the market and negotiate on your behalf. These professionals understand the market dynamics well and can even show you hidden opportunities.
Main Terms You Can Negotiate in a Commercial Lease
Before signing a lease document, you’ll have the opportunity to negotiate with the landlord to reach an agreement that will satisfy your business needs. Here are the main terms you can negotiate in a commercial lease.
- Service Charge : Mention things you’d not want to be included in the service charge, like repairs and upgrades to the property.
- Obligations at the end of the lease : You could discuss how to deal with any alterations you’ll have made to the property at the end of the lease period.
- Rights to sublet the property : You may be able to sublet the space but only with the landlord’s consent.
- Repairing obligation : If the property is not in good condition, you could convince the landlord to do the appropriate repairs and renovation.
- Monthly Rent: Judging from your preliminary research, if you feel the rent is off, you could negotiate a fair price with the landlord.
- Break Clauses: You can negotiate the right to terminate the contract before the expiry date based on the occurrence of specified events.
Final Thoughts on How to Negotiate a Commercial Lease
Negotiating a commercial lease can impact your business in many ways.
For instance, it can impact your profit potential because rent will probably be one of your biggest business expenses. Exceptional negotiation can also provide you with all the perks you need to run your business smoothly, such as employee parking.
We recommend you do your research well, stay calm, and make sure to seek the help of a commercial real estate lawyer to help you negotiate a favorable lease.
Get Help Negotiating a Commercial Lease
Do you need help with a commercial lease agreement? Post a project in ContractsCounsel’s marketplace to get free bids from lawyers to review and negotiate your commercial lease. All lawyers in our marketplace are vetted by our team and peer reviewed for you to explore before hiring.