As vacancy rates for commercial office space continue to decrease, many businesses lose substantial bargaining power when negotiating a new lease or an extension of an existing lease. That being said, small businesses have an advantage over other potential tenants, due to having more options for potential spaces to lease, which translates to bargaining power.
In a tight rental market, small businesses should focus on the following items when negotiating a new lease (or an extension of an existing lease):
Term of Lease
Shorter leases provide small businesses more flexibility, if you need more or less space or may require a different location within a few years. However, small business are often able to lock-in an affordable space for many years with a longer term lease (5-10 years or longer), and landlords are generally willing to make more concessions to tenants with longer term leases, such as free rent and/or landlord contributing to tenant’s buildout costs.
Rent
Shop around. Enlist the help of a commercial broker. If the landlord is not willing to reduce the rent, attempt to negotiate lower rent for the first 1-3 months to help defray moving and/or start-up costs. Attempt to cap annual rent increases and lease renewal rent increases.
Operating Expenses/CAM
A commercial broker will help you translate the “real” cost per square foot for potential space. Tenants often have to pay a share of a building’s common expenses in addition to base rent. These common expenses vary widely from building to building and need to be taken into account when determining the total amount of rent that will be due monthly and annually.
Tenant Improvements and Allowances
Are you starting a buildout from scratch or just updating interior finishes (i.e., paint and flooring)? If you have substantial buildout to complete, you may want to focus lease negotiations on the landlord covering all or a portion of the cost of the buildout. However, landlords are generally not willing to contribute to tenant buildout costs unless the tenant signs a long term lease.
Options to Renew/Expand
Many small businesses are hesitant to enter into a long term lease unless and until they have an established client base and are fairly confident they will not require more (or less) space during the term of the lease. Small business tenants may want to negotiate a short term lease with several options to renew to avoid having to re-locate when the lease term ends. Small business tenants may also have plans to grow their businesses during the first five (5) years of the lease term, so negotiating an option or right of first refusal on adjacent space (or other space in the same building) may be beneficial for a growing small business.
Assignment and Subletting
Being able to assign or sublet your lease provides additional flexibility to small business owners as your business and staffing needs fluctuate. At a minimum, if landlord consent is required in order for you to assign or sublet the lease, make sure the landlord “will not unreasonably withhold” written consent to a proposed lease assignment or sublease.
Services Provided by Landlord
Who is responsible for maintenance, repairs and replacement? This fluctuates from building to building and often times from lease to lease. In the event the tenant is responsible to maintain, repair and/or replace certain building systems or components, such as HVAC, roof or plumbing, negotiate a cap for the tenant’s maximum out-of-pocket obligation.
While there are many options for small businesses to negotiate favorable lease terms, even in a tight leasing market, engaging legal counsel to assist in negotiating lease terms will help you protect the interests of your small business and save you time and money in the long-term.
This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.
Wendy M. Reutebuch | Real Estate, Real Estate Finance and Creditors’ Rights
Wendy represents clients in both Illinois and Wisconsin in a wide variety of commercial real estate and real estate finance transactions. In addition to handling acquisitions, dispositions and leases, Wendy also advises lenders on loan transactions, loan workouts, loan restructurings, forbearance and pre-foreclosure matters. If you need assistance with a related matter, contact Wendy.
