First-time small business owners typically pay a great deal of attention to developing their own business plans, marketing and managing their own companies; however, they often overlook the importance of their own commercial lease. The commercial lease, provided by the landlord, often plays a crucial role in business operations (an entrepreneur typically leases commercial space to conduct business from). The lease states the specifics of the agreed-upon lease (e.g. lease term, tenant inducements, monthly rent, etc.) and includes many additional clauses—many of which can, and should, be negotiated before the lease is signed.
By successful negotiation, the commercial tenant can often benefit in a positive number of ways. Granted, the lease can often be dry reading; however, it can dictate the success or failure of a business so a tenant needs to pay close attention to this document. We have outlined a number of tips for first-time (and existing) tenants to consider before signing their first lease (or their lease renewal) in our book, Negotiating Commercial Leases & Renewals FOR DUMMIES, and summarized several of these below.
Allow Sufficient Time
For a new location lease agreement, get started six to nine months in advance to avoid unexpected situations and delays. Lease renewal negotiations should begin between nine and twelve months before the lease term expires. As an existing tenant, if you can’t get a decent renewal rate, would you rather find out you need to move with three weeks or six months left?
Never Just Accept the First Offer
Even if an offer seems reasonable or you have no idea what to negotiate for, never accept the leasing agent’s first offer. More often than not, this first offer is inflated. Many agents use a strategy of starting negotiations at a higher rate that allows them to give in slightly. The Lease Coach frequently completes lease agreements at 15 to 25% less than the agent’s opening offer (in one case, we negotiated the asking rate down from $8.00 psf to under $3.00 psf).
Select the Best Lease Length
While a five-year lease term is still standard for many businesses (7 or 10 years in some cases), it may not necessarily be the best term for you and your company. Three years, or even one year, for some tenants may be better if the cost for leasehold improvements is low enough since these are generally amortized over the life of a lease term. The agent—motivated by a greater commission paid by the landlord—will want you to sign the longest term possible; however, the landlord may be more flexible. Take the lease term that is best for your business.
Who Should Be the Tenant?
Don’t enter into a lease agreement (or an Offer to Lease) under your personal name. This will make you personally liable for everything. Instead, form a corporation or a holding company that will become the tenant. If you are negotiating of various locations but don’t intend to incorporate until a later date, then your Offer to Lease should state that the tenant is Your Name on behalf of a company to be incorporated (or Nominee). If you are opening multiple locations, it is often wise to form a new company for each lease agreement as further protection. Furthermore, corporations also have more tax benefits than sole proprietorships.
For a copy of our free CD, Leasing Do’s & Don’ts for Commercial Tenants, please e-mail your request to [email protected].