“PREPARED TO WALK AWAY”

THE BUSINESS OWNER’S GUIDE TO NEGOTIATING A COMMERCIAL LEASE

By

Richard Corey

Like any aspect of business, the ability to progress is highly dependent upon a solid foundation. Whether opening a new office or moving an existing business, the foundation of your physical store front begins with the agreement you reach with your landlord i.e. your lease. The lease agreement contains the crucial details that a business owner is tied to for the duration of the lease term. If not carefully negotiated, this agreement WILL make a significant impact on your bottom line. In my experience, it’s the terms “we don’t need to worry about” that always come back to haunt you. Each and every term in the agreement should be read and understood. Even if you’re happy with the terms as is, a business owner is doing themselves a disservice by not knowing exactly what they’re getting themselves into when they sign on the dotted line.

The first thing you need to consider is who drafted the lease. A landlord typically has his attorney draft the lease agreement. Because the attorney is representing the interest of his client, the landlord, the lease will most likely be drafted in the landlord’s favor. This is not necessarily a bad thing, but it is a fact you need to be aware of. Second, there is no such thing as a standard term. When beginning the lease negotiations, I commonly hear ridiculous statements such as “this is standard in all lease agreements.” I don’t care what anyone tells you, the only true standard in a lease agreement is that ALL terms are negotiable. Essentially all we’re doing here is making a business deal, and the BEST deals are ALWAYS equally favorable to all parties involved. In any commercial setting, if you get into a one-sided deal, someone ends up “with the short end of the stick” and that leads to confrontation within the relationship. The last thing you want to do is sign a lease that is a bad deal. Once you sign, you’re stuck.

When negotiating the lease, I typically break the terms down into three distinct categories, Deal Breakers, Important Terms, and the Wish List.

Deal Breakers are exactly what they sound like… terms within the lease that will break the deal if not properly addressed. In other words, if a landlord doesn’t want to negotiate this particular term, my client is prepared to walk away immediately. The art of negotiation is about leverage. At first glance, one may assume the leverage is held completely by the landlord; however, when you are prepared to leave the negotiation table, that somewhat takes the ball out of the landlord’s court.

Important Terms are also exactly what they sound like… terms that may not make or break the deal, but for purposes of getting the deal done, these particular items are very important. Although you may not walk away, we want to push very hard for these terms.

The Wish List is made up of the terms that we would like to have but aren’t of crucial importance. We worry about these items after we’ve taken care of the Deal Breakers and Important Terms. The goal is to negotiate the best deal possible that the landlord can live with i.e. reach that sweet spot that’s fair to both parties. To accomplish this task, both parties must be willing to give and take within reason. If your perspective landlord is willing to bend on the Deal Breakers, then be prepared to bend on some of the Important Terms or Wish List items. If for example your annual increase in rent is 4% and you want 2%, and the landlord already agreed to your Deal Breakers, maybe you meet him in the middle and propose 3% (this is just an example because % annual increase will most likely fall in the Deal Breaker category).

How we divide the lease terms into the three categories depends on the particular needs, expectations, and business model of the tenant as well as the particular needs and expectations of the perspective landlord. What is crucially important to Company A may not be that big of a deal to Company B. Let’s say you found the perfect spot at the perfect location where you know you can build your business. You need to weigh the costs of walking away on a Deal Breaker with the earning potential of that location. These considerations are different for every business and every potential landlord/location. Sometimes the lines between these categories can get blurred during the actual negotiations, but as long as you know what you need accomplished and are prepared to walk away, you should be able to get the job done with some strategic negotiation tactics and a little finesse.

All lease terms are important but here is a list of some major terms and their significance:

  1. Rent: Rent is typically determined on a price per square foot. $1,600 a month for 200 sq feet is more expensive real estate than $2,000 a month for 300 sq feet. Make sure you check the surrounding areas and know the average price per sq foot so you’re not over paying.
  2. Annual Increase in Rent: many leases include a % annual increase in the rent you’re paying. Many times a landlord will make you think he’s giving you a deal by giving you a free month of rent upon signing the lease or possible money toward your build out, but in reality he’s making all that money back, plus some, in your second and third year. Paying an annual increase in the rent is common but prior to signing the lease, you want to know what you’re getting yourself into, and be in a position to call out “BS” when you see it.
  3. CAM: Common Area Maintenance is in virtually every lease. You want to make sure you read the “fine print” and understand exactly how and when you will be charged for CAM. For example, a single word in the lease can make a HUGE difference in your CAM fees. To the untrained eye, there is very little difference between the following two sentences: “CAM based on rented space” or “CAM based on rentable space”. Here’s the difference, assume a shopping center has 10 spaces for storefronts, 3 of which are vacant. Assume for example CAM is $100,000.00 for the year. CAM based on “rented space” means the CAM fee divided by 7 or $14,285.71. CAM based on “rentable space” means the CAM fee divided by the 10 possible locations or $10,000.00. That one word just cost you $4,000.00.
  4. Rent Commencement: When do you start paying rent? Assume you have a build-out that takes 60 days to complete. Although you technically move in on January 1st, you wont be open for business until at least March 1st… you don’t want to be paying rent when you’re not even open for business.
  5. Exclusivity: for example, let’s say you’re a hair salon that also does nails and sells beauty supplies. You negotiate a lease in a new publix shopping center. You want to know that the landlord isn’t going to lease another store within the shopping center to a nail salon or beauty supply shop that will take away from your business.
  6. Build Out Allowance: Yes you can actually get the landlord to help pay for your buildout. This can be done in a variety of ways.
  7. Licensing/Permits/Zones/Code: You may not think this could happen, but the last thing you want to do is sign a lease and find out the city or town has a zoning or code issue with your business location, or there is a problem obtaining the necessary licensing or permits to do your build-out. This happens all the time. You need to know all the documents, licenses, and permits your business needs to get the doors open and address them properly in the lease.

Those seven items are just examples of the many terms in a lease that are crucial in your negotiations. The simple explanations provided are just some of their potential applications. Other significant terms are true-ups, AC, garbage, removal, days of operation, signage, removal, security deposits, right of access, terms of default, assignment etc. The list goes on and on.

Retaining an attorney to assist you in the commercial lease negotiation can be expensive, but think of it as an investment in the success of your business. Spending the money to have your lease negotiated by a trained professional can save you and your business literally thousands of dollars in the long run as well as offer peace of mind in minimizing the potential for unnecessary problems. Hiring a negotiating consultant in the beginning will definitely be cheaper than retaining a litigator down the road. At the Law Offices of Richard Corey, PLLC., we pride ourselves on providing our clients with the intimate and personal representation that they deserve. Before signing that “standard lease,” call us now or visit our website to schedule your free consultation.

Phone: 954-789-0461

Website: www.rcenterpriselaw.com

Email: richard@richardcoreylaw.com