What You Need to Know Before Negotiating Your Lease

Negotiating your lease with a landlord can be intimidating. It is likely that you have searched high and low for the perfect piece of real estate and you don’t want to do anything to jeopardize your position. But the space you rent could well be the single largest expense you have in your business. The value of your lease over a 5 or 10 year period can amount to thousands, hundreds of thousands, or even millions of dollars.

The good news is, that like any supplier contract, there is always room for negotiating,

Even if the landlord says they have a standard lease they want you to sign, they also have room to negotiate. The problem you have, is you don’t know what is open for negotiation and the landlord isn’t going to tell you either. You need to know what areas of the lease can be negotiated, what you can ask for and how to phrase it.

Creating a Negotiating Advantage

Let’s assume you are entering into a five-year lease and that lease starts October first. When do you think the landlord wants that lease to end? That’s right, he wants it to end September thirtieth, five years from now.

Now let’s assume you’re a retailer where more than twenty-five percent of your annual sales occur in November and December. You have now put yourself at risk of missing those key selling months, unless you renew the contract at the end of September. This means the landlord now has negotiating leverage when it comes time to renew – because they know you want to have those sales.

But there is no rule or law that says the lease must be in full years. For example you could negotiate a lease that is 5 years and three months to end at the end of December, just before you head into the time of negative cash flow during January to March.

Aside from getting those sales, you have the negotiating leverage because the landlord knows that if you don’t renew, it will be difficult for them to re-lease the space until Spring.

The Essential Elements of a Successful Lease Negotiation

The first thing to understand is that the leasing process has five elements. In this first article we will review the first two. These are the most critical steps and occur before you start looking for space for your business. Unfortunately, they are the steps most commonly forgotten, which can impact the entire negotiation.

Establishing a Solid Business Plan and Sales Forecast

Before you start looking for a property you need to finalize your business plan and marketing plan. From there, you need to look at your business needs and how the real estate will meet the needs of the business. This helps determine the criteria you will use to judge space and the negotiation. This includes detailing all aspects of the location, the space criteria such as size and layout and the actual requirements of the transaction such as timing of the lease, how much you can afford in rent and the rent structure.

Remember that rent should fit into the projected sales of the business plan. Don’t make the mistake of reworking the business plan and income to justify the rent.

Understanding Your Risk Tolerance

A lot of the property lease is about risk. In the standard lease the landlord provides you, you will probably assume most of the business risk. That is their ideal position. Little risk for the landlord and a LOT of risk for you. After the business terms, almost all the lease negotiations will be about moving that risk back to the landlord and having them assume some of your risk. But what is meant by risk?

Ask yourself these questions. What happens if a catastrophe happens, such as a flood or fire, can I get out of the lease if I can’t operate? What happens if the nature of the property changes? Will it affect my business and what can I do about it?

How much risk are you willing to assume? How will you protect yourself in these events? What will be your bottom line? You might not get all you want in the negotiation, so you have to think carefully about how much risk you want to take on and in what areas of the lease.

In the next article we will learn why the phrase “Location, Location, Location” is wrong.