It is no secret that the terms of a commercial lease tend to be favorable to the landlord. However, do not overlook the fact that tenants regularly succeed in negotiating terms making them more beneficial for the tenant. Here are some common terms that a landlord will typically be open to negotiating.
Allowance for Tenant Improvements (TI): It is common for landlords to share in the cost of improving a space as part of lease negotiations. This can be done in the traditional way where an amount is agreed to, the tenant completes the work and then submits receipts to the Landlord for reimbursement or direct payment to the contractor. Alternatively, the landlord may opt to provide free rent for a certain period of time. However, before agreeing to free rent, have a good sense of what your buildout will cost and how long it will take you to get the required license.
Growth options:
Renewals: Figuring out the optimal term for your business can feel like a Catch-22. On the one hand, a shorter term is preferable should the business not perform as well as expected. On the other hand, a longer term is optimal should the business meet or exceed expectations. Breaking up a longer term into multiple shorter renewal terms (think three 5yr terms, rather than a 15yr term) can be a great way for a tenant to hedge against the unknown success of the business. You can also negotiate future rent increases up front so you won’t be hit with huge rent increases when renewing.
Option to Expand: Another important consideration for the growth of your business is the option to expand. Should the business do so well that it requires more space, it is beneficial to have an option in the lease to add additional square footage. You can accomplish this by negotiating a right of first refusal for adjacent space or a larger unit in the same building or complex. Here again, this helps you plan the growth of your business because it will lock-in the costs and terms for this additional space ahead of time.
Assignment: The ability to assign the lease can be critical to selling your business in the future. While it is unlikely your landlord would allow you to assign the lease to a new owner without its approval, the conditions of that approval are typically negotiable. You also want the landlord’s approval to be held to a reasonableness standard, rather than providing the landlord absolute discretion. Carving out assignments to affiliates and subsidiaries, allows for even more flexibility. In this case, the parties will agree in advance to certain parameters such as years of experience, certain financial benchmarks, and background/credit checks.
Termination: Another way to hedge against being stuck in a long-term lease with an unsuccessful business is to negotiate a ‘kick-out’ clause that will allow you to terminate the lease should the business not hit a certain financial threshold within the first few years of the lease. Usually the ‘kick-out’ clause is effective in the second or third year and is triggered if the gross revenue at the location does not meet a certain financial threshold. Unlike the renewal option, you will have one opportunity to use the ‘kick-out’ clause and usually only for a short period of time (for example within 30 days after the end of the third year). Additionally, it is common for tenants to have the right to terminate the lease due to landlord’s bad acts (negligence, breach, etc.).
Exclusivity: The last thing you want to do is open your business and then have a competitor open up shop right next door. It is very common for commercial leases to contain exclusivity provisions, which prohibit the landlord from leasing to competitors. For very large commercial properties, the exclusivity may only apply to a section of the property, such as a wing or floor. Also, the definition of “competitive business” needs to be carefully considered. If you are a nail salon, it is obvious you do not want a nail salon next door or even in the same complex. But, what about a spa, hairdresser, or other similar business that may also provide nail services? The broader the terms of the exclusivity provision the better protected your business will be. Of course, getting to the right level of restriction requires reasonable negotiation on both sides.
Like the above, there are many other important terms in a commercial lease that you need to pay attention to prior to signing the lease. Never be shy about negotiating terms that are important and crucial for making your business successful. Remember, a good landlord will want you to succeed. But do keep in mind that the landlord must also ensure its interests – that the landlord’s property is protected; that you will meet your financial commitment and that you will be a good tenant. Thinking about the landlord’s needs and addressing those needs will allow you to negotiate from a position of knowledge and strength.
If we can assist you in fully evaluating and negotiating your next lease, please contact us at 305.222.7282. Also, please be sure to visit us at www.Ser-Associates.com and follow us on Instagram, Facebook, and/or LinkedIn and learn more about how we can assist you and your business!
