Negotiating a commercial lease is an important step to secure premises on terms that meet your business needs and your budget.
Effective negotiation can help you avoid costly mistakes and ensure you’re getting the best possible terms. You can achieve lease terms that are favourable to your business by preparing thoroughly, prioritising your needs, and employing effective negotiation strategies.
In this article, we’ll explore key tips and strategies for negotiating commercial leases. By avoiding common mistakes and seeking professional guidance from a commercial lease lawyer, you can get the best outcome for your business’s lease agreement.
Preparation is the foundation of any successful negotiation. Here are the key steps to take before you begin negotiating your commercial lease:
Start by researching the current market conditions for commercial rental properties in your area.
Understand the going rates for similar properties and identify any trends that might affect your negotiations. This information will give you a benchmark for what is reasonable and help you spot any red flags in your negotiations.
Check out our guide for business owners looking to lease a business premises for more information on your rights and obligations as a tenant. We also discuss the different types of business leases in that article.
Clearly define what you or your business needs in a commercial space. By now you should have already considered factors like size, location, amenities, and budget. The detailed negotiations are likely to begin once you have decided to rent a commercial property and receive a draft lease.
You might also receive a ‘heads of agreement’ or ‘agreement for lease’. An agreement for lease sets out the primary terms of the lease agreement while:
You must be careful with agreements for lease because they may still be legally binding. We recommend including a clause such as ‘Neither party will be legally bound to these terms unless and until a formal lease agreement is signed by both parties’. You should only include this term if you don’t want to commit your business and the lessor to the terms.
Be realistic about your needs and limitations and what you can compromise on. Knowing your priorities will help you stay focused during negotiations.
Engage professionals such as real estate brokers, commercial lease lawyers, or consultants who specialise in commercial leases. They can provide valuable insights and help you understand what terms are ‘usual’ or unfair.
If you do engage a lawyer to negotiate a lease on your behalf, make sure they are aware of:
When negotiating a commercial lease, there are several critical points to address. These are discussed below.
Rent is often the most significant expense in a commercial lease. Negotiate a fair base rent and be clear on how and when rent increases will occur.
Most landlords won’t be inclined to accept an offer that’s lower than the advertised rent. However, your research on market rates can be used to justify a lower price offering with real data. There may also be macro-economic factors that may mean the landlord is willing to negotiate the price.
You might find that, even if they aren’t willing to agree to a lower price for the entire lease term, they may be open to negotiating:
Determine the ideal lease term for your business.
Short-term leases offer flexibility and might be more suited to businesses starting out or looking to grow or expand in a shorter amount of time. Long-term leases can provide stability and may be a better option for well-established businesses that can easily predict where they’ll be at the end of the lease term.
Generally, the longer your lease term, the more leverage you may have when negotiating other parts of the lease. However, this means you’ll be ‘locked in’ for the duration of the lease.
For example, what happens if you enter into a long-term lease and your business grows faster than predicted? You could find yourself in a tricky position where you have outgrown your commercial premise and still have years left in your lease term.
Understand your budget, renewal fees and milestones when negotiating your renewal preferences. Effective negotiation at the outset can help to secure an extension of the lease under fixed conditions (such as set price increases for fee certainty).
Not all commercial lease contracts will include a renewal option, and landlords are not obliged to offer an option for renewal under the contract. Hold your renewal cards closely and try not to indicate that you want to stay long term. If the landlord sees the renewal of your lease as guaranteed, they may use this against you in the negotiation process.
Further, identify your obligations under the lease terms if choosing to renew (or not to renew).You must determine what notice periods are required or what fees you might need to pay on renewal (or exit). Commercial lease renewals are generally based on CPI increases, fixed percentage increases or subject to a ‘market review’.
Keep in mind that the longer your lease term, the more rent increases you’re likely to face. Unsurprisingly, it can be more favourable for landlords to renew contracts with their current tenants rather than not renewing. This is because landlord’s may incur loss in rent or additional expenses to advertise or renovate the premises.
Clarify who is responsible for maintaining and repairing the premises. Some leases may require the tenant to handle all maintenance, while others might include specific landlord responsibilities.
Generally, the landlord is responsible for all major structural repairs to the existing building, plant or equipment. Ensure these terms are clearly defined in the contract to avoid future disputes.
It can be a good idea to inspect the premises to get a feel of the maintenance or repairs you may need to undertake during the lease. This won’t always be clear, but there may be signs that indicate that the premises is in need of substantial maintenance or repairs.
Most landlords will draft a ‘make good’ clause into your lease agreement. These terms generally state that the premises must be returned to its original state before the end of the lease term.
If the commercial space was a vacant shell, you may need to do a complete office fit out. Make sure it’s clear if the landlord will contribute to any fit-out costs for works to the premises.
The landlord may choose to keep the fit-out as is at the end of your lease. Alternatively, if there is already a fit-out at the property and the landlord wishes it to be restored in that way, you may be required to return the property to its original look.
Make good obligations apply at the end of a lease term. They’re often overlooked, as tenants see this obligation as an issue to worry about later. However, you should still try to negotiate your make good obligations. You might be able to waive some or all parts of your obligations if your fit-out can be re-used.
We often see business tenants leave lease negotiations to the last minute. You may have already lost some leverage to negotiate if your business is desperate to secure new premises.
We recommend jumping onto the lease negotiations early. You may then have enough time to secure alternative commercial premises if you can’t agree to terms that you’re comfortable with.
Leverage is a key part of any negotiation. It means that there is something that one party has that the other person needs. Leverage can mean the difference between good lease terms and bad lease terms.
Our commercial lease lawyers are well versed in negotiation tactics. Effective negotiation requires a combination of strategy and skill.
Here are some key strategies you can use in your negotiations:
You should aim to avoid these common pitfalls during the negotiation process:
While rent is a significant factor, don’t overlook other essential terms such as maintenance responsibilities, renewal options, and exit clauses. A lower rent may come with unfavourable conditions that could cost you more in the long run.
Carefully review all lease terms and conditions. Ensure you understand your obligations and rights under the lease agreement. Ignoring the fine print can lead to unexpected costs and legal issues.
Include exit strategies in your lease agreement. This could involve options for early termination, subleasing, or assignment of the lease. Having a clear exit plan protects your business if circumstances change.
Learning from real-world examples can provide valuable insights. Here are a few case studies of successful and unsuccessful lease negotiations:
Research market rates, comparable properties, and the landlord’s background. Understanding local commercial real estate trends can also be beneficial.
Before negotiating a commercial lease, it is crucial to research several key areas to ensure you are well-informed. Start by investigating current market rates for similar properties in the area to understand what constitutes a fair price. Look at comparable properties to gauge what is available and at what cost.
Understanding local commercial real estate trends can also give you a competitive edge during negotiations. Gathering this information helps you approach the negotiation with a clear understanding of your position and the market.
Common negotiable terms include the amount of rent, the duration of the lease, and who is responsible for maintenance and repairs.
Additionally, you might be able to negotiate clauses related to rent increases, the option to renew the lease, and provisions for subletting or early termination.
By consulting with our expert commercial lease lawyers, you can ensure that you’re not missing opportunities to make the lease more favourable for your business.
Common mistakes can undermine your position during lease negotiations. We often see businesses focusing solely on the rent and overlooking other crucial lease terms, such as maintenance responsibilities, renewal options, and price increase clauses.
Another mistake is failing to conduct thorough due diligence on the property and landlord, which can lead to unpleasant surprises down the line. Additionally, not having an exit strategy can leave you vulnerable if the lease terms become unfavourable.
It’s essential to consider all aspects of the lease and how they will impact your business in the long term. Being well-prepared and seeking professional advice can help you avoid these pitfalls.
Start by listing your must-haves and nice-to-haves, distinguishing between essential terms and those that are less critical.
Consider the long-term impact of each lease term on your business operations and growth. For example, the lease duration might be crucial if you anticipate significant expansion.
Consulting with advisors, such as our expert commercial lease lawyers, can help you focus on what truly matters and negotiate more effectively.
Knowing when to walk away from a lease negotiation is crucial to protect your business interests. Be prepared to walk away if the lease terms do not meet your essential requirements or if the landlord is unwilling to compromise on critical points.
For instance:
, it may be better to seek other opportunities.
Additionally, if the landlord has a poor track record or there are red flags during the negotiation process, it’s wise to reconsider. Walking away can sometimes be the best decision to avoid entering into an unfavourable commercial lease.
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Leasing business premises is a significant financial commitment for businesses. Businesses premises leases are usually lengthy legal documents that need to be properly negotiated and understood. This article is written
