How to Negotiate a Commercial Lease for Retail Space: 8 Tips
If you’re looking to lease retail space, you’ll want to make sure you’re getting the best possible deal. Knowing how to negotiate a commercial lease for retail space can be tricky, but with the right negotiating skills, you’ll be able to get the most favorable terms for your business. When we first started our business, my husband and I had no idea how to negotiate a commercial lease for retail space. We were lucky enough to find a great landlord who was willing to work with us on some of the terms of the lease, but there are definitely some things we wish we had known before going into negotiations.
Here are 8 lease negotiation tips that will help you get the best possible deal on your next commercial lease, but first let us define what is a commercial retail lease.
What is a commercial retail lease?
If you’ve rented apartments in the past, you’ll need to do some extra research before negotiating a commercial lease. Commercial leases are typically much different than residential leases.
The average commercial lease term is 3 years, while home rental terms are typically shorter. This gives you more flexibility when it comes to negotiating responsibility structures with your landlord.
The responsibilities of the parties involved in a commercial lease are more flexible than in other types of leases.
“Call, Call, CALL!”
When it comes to retail, location is key. You want to take your time finding the best location for your store in order to maximize visibility and foot traffic. The right location can make all the difference in the success of your business.
Now that you’ve found the perfect location for your business, it’s time to negotiate the lease. This is an important step in ensuring that your business has a solid foundation.
Whether you’ve opened your first store or you’ve been in business for years, your retail lease agreement will be one of the most important contracts you sign.
If you have a poor lease agreement, it can be very costly for you, even if you are meeting all your sales goals.
In this guide, we’re going to go over how to negotiate with a retailer for favorable lease terms. Keep these tips in mind when negotiating with a potential landlord.
What are the types of commercial retail leases?
There are different kinds of rental contracts, and the price you pay in monthly rent will depend upon the type of contract you sign. With some rental agreements, your monthly payment will be lower, but you will have to take care of things like utility bills, repairs, and property taxes. With other lease agreements, your monthly payments will be higher, but your landlord will take care of all expenses.
As a brand new retailer, you may find it more beneficial to pay the premium in order to have all financial responsibilities taken care of by the landlord. This allows for a more efficient budget on your part. Clint Gharib offered clarity on the four main ways that commercial leases are structured in Forbes. It is important to note that you will likely have more negotiating power regarding the lease provisions with an independent landlord as opposed to a corporate one.
As a general rule, you will have more negotiating leverage with an independent landlord than a corporate one. This is due to the fact that independent landlords are not bound by the same rules and regulations as corporate landlords. As such, they are often more willing to negotiate on things like lease structure and base rent.
In many cases, it can be quite difficult to negotiate rent, let alone the other terms of a lease, in a mall setting.
At a shopping center, negotiation is the name of the game.
There are a lot of little things you can do to negotiate a favorable commercial rental. By understanding all of the options, and working with professionals, you can ensure that it’s beneficial for your business.
Some of the small ways landlords can negotiate a lower monthly rental rate are to ask for a shorter lease, ask for free or reduced rates during slower seasons, or ask for a percentage of revenue instead of a flat fee.
How to Negotiate a Sublease
Before you even start to look at possible business spaces, you need to know exactly what you can afford, what features are absolutely necessary, and which would be nice but aren’t necessary. This will help you find the perfect place to rent.
If you’re just starting out, the ability to sublease in case things don’t work out is probably more important than free parking. However, if you have your own transportation or are willing to use public transportation, free parking may not be as big of a deal.
Those extra things will be your bargaining chip.
How to Negotiate a Lease
If you’re looking to rent a commercial property, it can be helpful to hire a commercial real estate agent. These agents specialize in negotiating leases and can help you secure the best deal.
They’ll be able to catch any deals or clauses that are in your contract that you might have missed.
How to Negotiate a Commercial Lease for Retail Space From a Place of Strength
To negotiate with someone, you should work on multiple deals at once. This puts you in a stronger position, as you’ll be able to walk away if things aren’t going your way.
1. Look for free rent.
Free Rent can be used as a promotion or as leverage to negotiate a rental price.
A potential tenant may want a lower base rental price, but a landlord may not agree. Instead, they may offer a discounted monthly rate in exchange for a longer lease. This could help both the landlord and the tenant.
On a 3 year lease, 1 month of rent per year will be waived, resulting in an 8.3% discount on the total price.
When negotiating with your landlord, try to negotiate for more than just one month of free rent. You should also try to get them to waive area maintenance costs or utility fees.
2. Ask for a fair “cure” period.
If you are late on rent, you are usually given a “cure” period in order to make up the missed payments. This is typically a set number of days, after which the lease is terminated automatically.
If you don’t have a grace period written in your lease agreement, you could end up having to pay fees or legal expenses for something as simple as missing a rental payment by a day. You don’t want to make a small error that spirals into something bigger.
So be sure to ask for a cure period to be written into your lease agreement before you sign it. A cure period is an important part of any lease agreement, and most landlords will be happy to agree to one.
3. Negotiate lower early termination penalty fees.
Early termination fees can be a burden for new retailers. However, it is possible to negotiate these fees in order to provide peace of mind.
4. Add a sublease clause.
Adding an addendum to your lease that details your intentions regarding a sublet is a good way to give yourself some flexibility if you need to move before your term is up. This will allow you to rent out your business space for the remainder of your contract.
5. Have a co-tenancy clause written in.
If a major tenant that is important to your business moves out of the building, you can break your lease using a co-tenancy clause.
This becomes especially important for small business owners who operate in a mall with a big-box retailer.
The traffic that a big box store provides can be good for a location. However, you want to make sure that you can break your contract, in case anything happens to that store.
In a situation like that, you’re probably worried about breaking your lease agreement if something happens to the store you’re renting.
6. Include a competitor clause preventing your landlord from renting out space in your building to a competitor.
If you are worried about your competition moving in next door, you can request that your landlord include a competitor clause in your lease agreement preventing them from renting space to anyone in your same line of business. This is a smart idea, and while it may not be a make-or-break issue, it is certainly something worth negotiating.
7. Pay attention to the HVAC responsibility.
The cost of a building’s HVAC system is a tiny thing, but it could cost you thousands. Ask your landlord if you can take that on.
And, if that doesn’t work, you can cap your yearly out-of-pocket costs on the plan.
8. Haggle over the fixturization period.
If you’re planning on opening up your own store, chances are you’ll have to do some remodeling. It can be as simple as hanging up a few items or it could be more time-consuming.
Others, however, may prefer you redo the space yourself, but be willing to provide free rent during the fixturization period. You shouldn’t have to pay for renovations or rent while the store is being set up. Some landlords may do it for you if you’re already paying rent, but others may give you a break on rent if you’re willing to do the work yourself.
Some landlords may be willing to let you do your own renovations, but may want a free month’s rent in return.
) When making significant changes to your space, it’s important to factor in the time needed to obtain permits and complete construction. You may be able to negotiate free rent for up to 120 days in order to make these changes.
Don’t be afraid to negotiate your lease with your landlord. Doing so could save you money, and could even get you some added benefits. Just remember, their initial proposal is just their starting price.
What should a commercial lease include?
Before signing any lease, be sure to consider all the factors involved. Here are a few of the things you should look out for:
When looking for a commercial lease, you should keep an eye out for a few key components. These include the lease term or type, rent amount, security deposit, permitted use, exclusive use, renovations, exterior appearance, insurance, Americans with Disabilities Act compliance, personal guarantee, amendment modification termination clauses, maintenance costs and subleasing. While it is always important to seek professional advice before committing to any lease agreement, being aware of these key components will help you make the best decision for your business.
Commercial leases can be complicated, but success often boils down to the ability to align expectations and maintain a cordial relationship. Having access to market and industry information, such as comparable rents and average lease terms, can be a big help.
Negotiations for your commercial lease can be as quick as a few days, or as extensive as months of work. However long they take, it’s important to make sure that you’re getting the best possible deal for your business.
If you’re looking to lease retail space, it’s important that you know how to negotiate a commercial lease for retail space. With these 8 lease negotiation tips, you’ll be able to get the best possible deal on your next lease. Remember, knowing what your business needs and doing your research are key in getting a favorable outcome in the negotiation process.