Top Six Tips for Negotiating Your Commercial Lease
Negotiating and signing your commercial lease can be a substantial investment for your business. It’s critical that you’re aware of what you are committing to. While it’s tempting to save the professional fees on this process, a poorly written lease can end up costing you thousands more in the end.
The Accountant Perspective Can Help You When Negotiating Your Commercial Lease
Most commercial rental agreements are written so that you pay a base amount for the area plus a percentage of the occupancy costs of the building. These occupancy costs can include property taxes, insurance, repairs and maintenance, management fees, etc. It is this occupancy cost portion that can present your greatest financial risk.
1. Beware Management Fees
It’s normal to see some sort of management fee included in your occupancy costs.
What would be a fair fee to charge you based on the services that they provide by collecting your rents and ensuring that the building is safe and in good repair?
I’d suggest having the formula for these management fees spelled out in your lease. This formula would depend on the level of service that your landlord provides. Ideally, this formula would be based on a percentage of base rents that you pay. Simply stating that you will pay for management fees means that your landlord can pick any number they like and add it to your invoice.
2. Building Improvements VS Repairs
Does the occupancy cost section detail what is considered a building improvement vs basic repairs and maintenance?
Yes, it is reasonable that you pay for cleaning, snow removal, some light bulbs in common areas, and other reasonable maintenance costs. If your landlord decides to upgrade from commercial-grade carpet to marble tile, will you be responsible for paying for it?
Review this wording very carefully.
I think of my mechanic client that was looking to rent a condo bay. I reviewed his draft lease that would have put the tenant open to the liability of paying their portion of the Taj Mahal if the landlord chose to renovate.
3. Rights to Review the Details
Make sure that you have the right to request the details of what your landlord is charging you. I’ve encountered many horror stories where a landlord will pay service fees to their various relatives at a rate far more than the fair market value for the task. Picture paying $6,000 for someone’s child to plant a dozen petunias. Let it be known that you’re onto that game and won’t be paying for it.
1. Evaluate your business needs
Do a little homework before negotiating a lease. List your company’s current and expected future space needs, and determine your budget and preferred location.
“Ask yourself what you want to get out of moving,” Prikker says. “You can then negotiate a lease that covers everything off.” If you’re uncertain about near-term needs, consider a shorter lease (for example, two or three years). “You may pay more per square foot for a shorter lease, but at least you can walk away more easily if you need to,” Prikker says.
4. Review Your Rental Space
Believe it or not, landlords don’t always have an accurate handle on how much space they are renting to you. This is particularly true in larger high-rises or older buildings that have seen many renovations.
When is the last time that space had been measured or certified?
5. Personal Guarantees
Avoid them if you can. If you’re new to business your landlord may insist on you signing a personal guarantee. If this is required, ensure that this guarantee has a limit. Ensure that there is a clear maximum that you can be liable for. When you negotiate a commercial lease renewal after the first term, have them remove this personal guarantee.
6. Do Not Assume Your Landlord is Right
Your landlord likely does not have an accounting background. The people preparing your occupancy cost statement at the end of the year may or may not actually know what they are doing. They may or may not be preparing that statement in accordance with your lease. I found a prime example of this earlier in the year. The annual occupancy cost statement arrived in the form of a bill with $60 additional fees owing. Upon inspection, they were charging an incorrect management fee and the leasable area was overstated. The true result was a $3600 refund of the monthly occupancy costs paid. Examine your statement and compare it to your lease.
How to Negotiate Commercial Leases That Favor Tenants
If a landlord or leasing agent simply tells you the terms, ask for something showing the terms in writing before you submit a counteroffer. If they are reluctant to offer a letter, ask for an email or a copy of the listing for space (which will contain at least the basic leasing information).
Why is it so important to have initial terms in writing? A leasing agent acts on behalf of the interests of the landlord. If an agent either misunderstood or attempted in any way to alter the landlord’s directions, having terms in writing can show you a landlord that your counteroffer was made in good faith based on information from the leasing agent.
It is also possible that you could misunderstand lease terms if they are not in writing. This could lead you to counter too high or too low based on the information you misunderstood.
Another reason to have the terms in writing is that it allows you time to research more about the lease, to ask an attorney about the terms, or even to compare terms to any other leases you are considering.
Asking for terms in writing is not in any way a legal commitment on your part to move forward. You always have the option of countering the terms or simply turning them down outright.
The horror stories are endless. Have your lawyer and accountant review your draft lease to make sure you are fully aware of what you are signing. Remember to protect your interests while negotiating your commercial lease!
Angela Richardson is a Chartered Professional Accountant (CPA, CGA) with more than 17 years experience working in public practice with small to medium sized businesses. While financial statements and tax returns are part of the occupation, consulting and assisting clients to achieve their entrepreneurial dreams is her true passion.