How To Negotiate A Lease
After months of searching, you've finally found the perfect location for your business. You're eager to sign on the dotted line. Not so fast! Before you commit to a location, make sure you negotiate a lease you can live with.
Rent is the largest expense for most businesses in commercial locations, so it's important to get what you want from a lease, cautions Jack O'Donohue, executive vice president of commercial real estate firm Stratford Associates in Fairfax, Virginia. While rents have gone up in many parts of the country, it's still possible to strike a bargain if you know how to negotiate.
To get a good deal, you or your real estate broker should always try to modify the terms of a lease, says B. Alan Whitson, a national real estate consultant in Newport Beach, California. "The standard lease is always written in the landlord's favor," he explains. "[It's up to you] to negotiate better terms.'
How to get the best price? Pay close attention to seven areas of the rental agreement:
1. The overall lease. "A lot of small-business owners don't read the lease and don't understand it,' Whitson says. But it's your responsibility to understand what you're getting into. "The lease document is the rule book," Whitson says. "Whatever is in there, you're stuck with.'
Like any contract, the lease should be reviewed by an attorney, says Fred Steingold, author of The Legal Guide for Starting & Running a Small Business (Nolo Press). "Most attorneys can review a lease in less than an hour,' he says, "so it's not a big expense, and it's a safety valve for potential problems.'
2. Square-foot price vs. the bottom line. Many leases state a base rent per square foot. "This rate can be misleading,' Steingold says. "Sometimes it includes space that's not useable, such as corridors and elevators. That makes it difficult to compare two leases.'
Look, instead, at the total amount to be paid. "Sometimes a space that's slightly smaller with a higher [price per] square foot may work out better for your business because it's more efficiently laid out,' Steingold says.
3. Length of the lease. Many new business owners want a short lease or no lease at all. That way, if the business is unsuccessful, they aren't on the hook for thousands of dollars for space they no longer use.
It may be difficult to get a short lease if you're in a tight housing market. When space is scarce, many landlords won't settle for leases shorter than five years, says O'Donohue.
4. Tenant improvements. Carol Hackman's landlord was willing to remodel an unfinished space when she signed a five-year lease for her Web-site design and development firm, The Laser's Edge Inc., in a Wilmington, Delaware, business park. "I had been there two years and wanted to upgrade into a different space,' she says. "I looked at [existing] spaces in this center and none was right for me. The owner moved us without hesitation.'
You may want to save money by making improvements yourself, but most leases require the landlord's permission. "Submit your plans before you sign the lease," Steingold says.
5. What's included and what's not? Too many small-business owners focus on dollar amounts without considering what they get for their money. Some tenants pay for utilities and a percentage of common area maintenance. Steingold's law firm has a gross lease, which includes all expenses, but some tenants sign a triple net lease in which they pay their own property taxes, insurance and maintenance. In such cases, the base rent is less.
Also watch for nonmonetary clauses. Will heating and air conditioning be shut off after business hours or on weekends? This may be important if you plan to work odd hours.
6. Subleases and allowable uses. If you decide to move or find that you're using just part of your space, you may want to sublease or assign the lease to another business. But most leases won't allow this without the landlord's approval.
Most leases also specify the type of work you can do on the premises. Landlords tend to make this "allowable use" as narrow as possible. In most cases, you should make it broader, Steingold says, to allow for future expansion of your business.
7. Pass-through expenses. "A common trap for tenants is the annual increase in operating costs, or `pass-throughs,' " says O'Donohue. "They'll ask for a 4-percent or 5-percent [annual increase] to protect the landlord against inflation.'
These days, the increase often is more than the inflation rate because the soft real estate market of the early '90s forced landlords to forgo any rent increases for a long time. Watch for inaccurate calculations of operating costs, Whitson warns: "Overcharging tenants 10 percent to 15 percent is not uncommon.'
Leasing a commercial space poses some risks, but by paying attention to these seven points, you can protect yourself and get your business off on the right foot.
Jan Norman is a freelance writer who specializes in small-business issues.
Learn The Lingo
Lease terms you should know:
- Lessor: landlord
- Lessee: tenant
- Right of first refusal: before vacant space is rented to someone else, landlord must offer it to the current tenant with the same terms that will be offered to the public
- Gross lease: tenant pays flat monthly amount; landlord pays all operating costs, including property taxes, insurance and utilities
- Triple net lease: tenant pays base rent, taxes, insurance, repairs and maintenance
- Percentage lease: base rent, operating expenses, common area maintenance, plus a percentage of tenant's gross income (most common for retailers in shopping malls)
- Sublet: tenant rents all or part of space to another business; tenant is still responsible for paying all costs to landlord
- Assign lease: tenant turns lease over to another business, which assumes payments and obligations under the lease
- Anchor tenant: major store or supermarket that attracts customers to a shopping center
- Exclusivity provision: shopping center can't lease to another tenant who provides the same product or service that existing tenant does
- CAM: common area maintenance charges, including property taxes, security, parking lot lighting and maintenance; may not apply to anchor tenants in retail leases
- Nondisturbance clause: tenant cannot be forced to move or sign a new lease if building or shopping center is sold or undergoes foreclosure
Get The Answers
Here are some questions to ask before signing a lease:
1. Does the lease specifically state the square footage of the premises? The total rentable square footage of the building?
2. Is the tenant's share of expenses based on the total square footage of the building or the square footage leased by the landlord? Your share may be lower if it's based on the total square footage.
3. Do the base year expenses reflect full occupancy or are they adjusted to full occupancy (i.e., base year real estate taxes on an unfinished building are lower than in subsequent years)?
4. Must the landlord provide a detailed list of expenses, prepared by a CPA, to support increases?
5. Does the lease clearly give the tenant the right to audit the landlord's books and records?
6. If use of the building is interrupted, does the lease define the remedies available to the tenant, such as rent abatement or lease cancellation?
7. If the landlord does not meet repair responsibilities, can the tenant make the repairs, after notice to the landlord, and deduct the cost from the rent?
8. Is the landlord required to obtain nondisturbance agreements from current and future lenders?
9. Does the lease clearly define how disputes will be decided?
Source: 327 Questions to Ask Before You Sign a Lease, by B. Alan Whitson (B. Alan Whitson Co., 800-452-4480).