Six Keys To Negotiating Your First Business Lease

Updated: Jan 25

Ok, you’ve done your homework and all signs indicate it is a GO to renting space. You’ve met with your realtor and have identified a specific property that would be a good fit and you’re looking at a lease agreement provided by the potential landlord. If this is your first deal, you’re likely to simply sign the agreement, even if there are things you don’t understand or agree with in principle. A word of advice? Don’t do that! Work with an attorney and your real estate agent to negotiate the best deal possible.

Everything is negotiable. And if it isn’t negotiable, then there are other properties out there. Really! Don’t put yourself in a position that you can’t get out of for an interminable period of time, because you thought you had no choice. There’s always a choice. Below are six keys to negotiating your lease agreement effectively.


1. Rent Agreement vs. Lease Agreement

If possible, look for a rental agreement vs. a lease agreement. Rent agreements typically run month-to-month. These are great for small start-ups. It gives them the space they need while limiting their overall exposure should something go awry and the business needs to scale back or close. Lease agreements, conversely, run for longer terms, often 3 years.


2. Build-Out of Premises

Leases come in all shapes and sizes, but the triple net lease and gross lease encompass two opposite approaches to how leases are typically written. The triple-net lease requires the lessee (You) to pay rent, repairs, real estate taxes and insurance on the leased space. A gross lease simply requires the lessee to make a lease payment, from which the landlord pays for these same costs. Given the same property, one can understand the gross lease payment would be higher than the triple net lease payment. The question may simply come to, do you want the hassle of paying for the other costs yourself or not.


3. Triple Net Lease vs. Gross Lease

Leases come in all shapes and sizes, but the triple net lease and gross lease encompass two opposite approaches to how leases are typically written. The triple-net lease requires the lessee (You) to pay rent, repairs, real estate taxes and insurance on the leased space. A gross lease simply requires the lessee to make a lease payment, from which the landlord pays for these same costs. Given the same property, one can understand the gross lease payment would be higher than the triple net lease payment. The question may simply come to, do you want the hassle of paying for the other costs yourself or not.


4. Life of the Lease

As a first-time tenant, you will likely want the shortest term you can negotiate. This serves a couple of purposes. It reduces your overall exposure and also gives you the opportunity to upgrade your lease or surroundings, if you find your business has outgrown the space you have. It may be a necessity to move out when the lease expires, so give yourself the opportunity to do so when it’s most convenient for you.


5. Renewal Terms

In a lease, there will be a renewal clause included, which stipulates how the renewal process will occur and at what rate the tenant could expect rates to increase upon exercise of the renewal. Again, this is negotiable. See if you can get the renewal terms on a month-to-month basis. That may prove valuable someday. Know what is fair and make sure you understand explicitly if the lease auto-renews or if an intent-to-renew request must be filed with the landlord by a certain date. Make sure you have this information burned in your memory!


6. Potential Space

As we discussed above, you may find out the space you’ve leased/rented is not sufficient for the growth of your organization. We’ve already discussed keeping the initial term of your note as short as reasonably possible, but here are two other considerations for handling this problem.

First, approach the landlord to see if they have any other space that might be workable. Would they be willing to provide this space to you at the same or less rental rate and over the remaining life of the current lease? This provides you with the ability to alleviate a short-term problem and give the flexibility to look for more ideal properties if need be.

Second, if the landlord does not have any properties. See if you can find another property that will work in the meantime that will meet your need for the excess space. If you can, negotiate an agreement that matches your terms of your original lease, allowing you, again, to look for more ideal properties that meet your longer term needs.

Finally, walking away from a lease before the terms run out is a violation of the agreement. The landlord can sue for breach of contract. I’ve seen this happen several times and it’s not real pretty. If you must walk away from a lease, talk to your landlord in advance and be prepared to discuss a hefty settlement fee. I would only suggest this if you have prepared for this event and have set aside adequate funds to pay the remainder of your lease out. That is a fair, equitable and honorable way to handle it.

Hopefully you can see that within the rent or lease agreement there is ample room for negotiation in a number of areas. The important thing is to stay objective and realistic in your negotiations. An attorney is of great value in this regard, and should have the requisite skill to explain tough-to-read legalese that always accompanies such documents. The stakes are high, so be sure you do your due diligence before you sign that agreement!

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Just a reminder; the next article in the Where Do I Start? series will be addressing the question of a home-based business owner, 3 Questions To Ask Yourself Before You Take Out A Loan

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