Negotiating a lease is like a game of chess. Move, countermove - offer, counteroffer - both chess and negotiation depend on the ability to read and adapt to a changing situation, carefully positioning your assets while thinking several steps ahead. A well-executed gambit can win a game - or result in a great deal. Here are seven “strategies” to help guide your commercial lease negotiations.
1) “Know thyself” – formulate a budget and know what you can afford.
In a chess match, if you’re unfamiliar with how your own forces move and work together, you’re going to have an uphill climb towards victory. You need to know the basics of what you can do and what you want to do before you begin. In leasing negotiations, even before bidding on a space, you should start with determining your budget, the ideal location and desired amenities for your needs, and then deploy your income and assets in a strategic way to maximize your chances of success. Prioritize budget and must-have lease options, and then order your “would be nice” amenities according to your preference. Expect your “would be nice” list to grow as you view more properties and discover perks you may not consider at first, but don’t budge on your budget.
2) “Know the ‘enemy’” – understand all of your potential costs.
Your landlord isn’t really the enemy, but they do want to maximize profit - which means getting you to pay for as many expenses as possible. First order of business, then? Understand lease types and “hidden” costs. Know the difference between gross, modified gross and triple net leases – and then verify the lease offerings you’re considering are “as advertised”. Then, consider additional costs. Are there some maintenance items you’ll have to cover? If the property is multi-tenanted, are there common area maintenance costs? What maintenance are you responsible for in that single tenant, triple-net building? For a single tenant, triple net lease, what building repairs and maintenance will you be expected to make, and what is a reasonable annual cost to expect for that work? These additional expenses are a good place to get or give concessions when negotiating more central lease terms, such as rent, duration and renewal options.
3) Understand the battlefield – do your due diligence & research the market
There is a vast amount of information available to prepare you for negotiating with potential landlords. First, know the space you’re renting, and the property or properties you’re considering. Does the space’s size match up with the square footage reported by the landlord? What tenants are already in the property, if any? Does it have a strong anchor? How long was the space you’d occupy vacant? What do nearby demographics look like? What’s the volume of passing traffic? Once you have a handle on the properties you’re considering, then look at comparable spaces and see what terms are being offered. Is free rent common in your market? Do most landlords offer concessions for tenant work? What is the typical lease term, average rents over the lease term and availability/cost of renewal periods? If you are looking for a longer lease term, can you use that to leverage a lower rent? Getting a feel for the range of rents and terms available in your area can help you to spot a good deal or to avoid a bad one.
4) Have a good diplomat – use a third-party negotiator for expertise and negotiating options
An experienced go-between can be invaluable in negotiating your lease. Have a lawyer and broker handle the talks on your behalf. A good broker will have a handle on the market and a good lawyer can advise you on the specifics of the deal while communicating seriousness and professionalism. They can also bring value simply by separating you from direct negotiation. Don’t underestimate the value of the ability to break off discussion for a private attorney/client conversation. It is an easy “out” to avoid being pressured to agree to something you’re not ready or willing to concede.
5) Take multiple avenues of attack simultaneously – consider more than one space simultaneously.
A good chess player keeps as many options open as possible. Likewise, don’t limit yourself to one property – when you do your research, choose a few acceptable locations based on your needs. Then, review term sheets and/or solicit written lease offers from your three top choices simultaneously. If you’re offered a better deal on your second or third choice, there’s no reason not to see if your first choice will match or beat those other offers to fill the space, particularly if there is low demand for the type of space you need. Alternately, if you can tell that the landlord in your top choice is going to make your tenancy difficult by refusing to budge or asking for too many harsh or unfavorable terms, you have a plan “B”. While it may be impracticable to go too deep into negotiations on multiple properties, knowing what you can get for an acceptable alternative gives you flexibility and leverage.
6) Build a wall of protection - push for favorable language in your lease for any and every situation
The best deal isn’t always just about the lowest base rent. What happens if your rent is a day or two late? Is there a huge late fee? How much is the security deposit, and can you get any back if you are consistent in paying rent and taking care of the property? How long do you get that rent before there is an increase? What happens if you have to terminated the lease? Can you sublet the space, or share with another tenant? Do you pay rent while the property is being fit-up for use? Can the landlord lease out another space in the property to a competing business? If you’re paying property taxes, do you have a say in any assessment appeal? Better yet, are you in control of any appeal, and are there any beneficial cost sharing provisions? Do you have to keep paying rent if there is a pandemic and the government forces you to shut your doors for six months? These parts of the lease may not be front and center in most lease negotiations, but maybe they should be - give them serious consideration and push for the most advantageous language for your position.
7) Take every advantage – negotiate for inducements and perks
In a chess match, there is almost always some angle the player just can’t cover, or there will be ground they’re willing to concede in their overall strategy. Just like when you’re asking to reallocate cost, the ability to sublease or get a better break if you’re late on the rent, extra perks are achievable and beneficial. Even small ones. Go for something like dedicated parking for your customers and employees, free Wi-Fi, free office furniture, or prominent signage. You won’t know if a landlord will make a concession unless you ask.
Remember, a well-negotiated lease is the foundation for a successful landlord-tenant relationship, giving tenant’s businesses the certainty and predictability to thrive, while protecting landlord’s property and helping to achieve investment goals. Preparation, professionals and good negotiating strategy will yield fruitful outcomes in commercial lease negotiations.