Rent is one of the largest expenditures for small businesses and can make a huge difference in your profitability and long-term viability. Re-negotiating lease agreements should therefore be an annual event where you make sure the business lease terms still fit in with your overall business strategy and plan.
Take time to engage with these 10 important steps before renewing your commercial lease.
Before opening your doors, you likely put together a business plan and strategy that made several assumptions. Now that you’ve been in the location for some time you have a good sense of how much that location can bring you in terms of revenue as well as the costs of doing business in that area.
Every time you renew a lease, all terms are up for renegotiation. Monthly rent is the most obvious clause to renegotiate, but it’s not the only one. If the location rocks, but the bathroom is an embarrassment, try negotiating a bathroom makeover or needed repairs. If the rent is fair, but the windows are drafty, negotiate for the landlord to pay the heating bill or fix the windows. Remember: Everything is negotiable.
In every business arrangement, there are intangibles. Landlords value good tenants. Are you timely with your payments? Do you have a strong credit history? Are you a low risk? Do you bring in business for surrounding businesses, or are other tenants complaining about you?
It often costs landlords more to get a new tenant than it does to keep a good tenant. For example, new tenants often demand tenant finishes—walls repainted, minor construction, or new carpeting. If you’ve paid your rent on time and have been a good tenant, odds are the landlord will want you to stay and would be willing to offer some tenant finishes.
Research other locations and use them as your BATNA—your Best Alternative to Negotiating an Agreement with the current landlord. If there are comparable locations available, what would it cost to move? Can you use the threat of moving to reduce your current monthly rent? Can you cap yearly increases? Is it necessary to give additional security deposits for each year you remain in a location, or can this be waived? Knowing your best alternatives to the current lease helps you make sure you aren’t taken advantage of.
Many merchants focus on re-negotiating the rental fees and aren’t paying enough attention to the other clauses in the lease. Be wary of clauses that limit your ability to do business. For example, are you allowed to sublet space if you decide to partner with another business or need to close suddenly? Are there restrictions on your space that you can ask to be lifted such as closing time, whether you can expand your business onto the sidewalk, or what services you may provide? Can you request exclusive rights to the building for your services or radius restrictions? Are the termination rights fair and favorable to you?
Your lease says how many square feet of space you’re renting—is it accurate? Measure all the usable areas of the space and make sure you’re not overpaying.
Investigate ways to sweeten the deal for yourself. For example, landlords often have more than one property in an area and it’s possible he can offer additional perks. Ask the landlord to give you more value as part of the lease. Perhaps there is additional storage space available for your inventory or additional parking spaces nearby for customers. Can the landlord offer additional signage on the building or nearby to increase the visibility of your business? Adding perks to your business lease terms can make a big difference to discoverability and accessibility to your business.
Hidden in the legalese is often an insurance clause. Typically, landlords require additional insurance to protect themselves against lawsuits. Rental lease language is often written to favor the landlord, and it’s possible that the landlord requires the same insurance for all their renters regardless of the type of business or real risk. Question this clause and offer to purchase only insurance that is reasonable and makes sense for your type of business. Once the lease is signed the insurance costs become a fixed cost of doing business and are worth negotiating.
Is it clear who is responsible for what? Do you know how disagreements will be handled? Is the lease valid in your state, or will you have to find a lawyer in another state to represent you if there are problems? Read every clause.
Create a written Request for Proposal with your demands. Include the desired lease term, requested improvements and finishes, additional perks, changes to property use requirements.
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Disclaimer: This information is provided for informational purposes only and should not be construed as legal, financial, or tax advice. Readers should contact their attorneys, financial advisors, or tax professionals to obtain advice with respect to any particular matter.
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