“Location, location location.”
That’s probably the most overused phrase in real estate — but for good reason. Location is a make or break factor, particularly in retail. The location of your store can significantly impact your visibility and foot traffic, so you want to take your time finding and securing the best one.
Now, if you’re already eying a great location, the next step is to negotiate your lease.
Whether you’re a new merchant renting your very first physical shop or you’re a multi-store retailer who’s looking to expand to even more locations, your retail space lease will be one of the most important things you set up. A poor lease agreement can drain you financially even if you’re making all your sales goals.
In this article, we’ll talk about how to negotiate a favorable retail lease. Go through the tips below and keep them in mind when you’re dealing with potential landlords.
What is a commercial retail lease?
Commercial retail leases are different than home leases, so even if you successfully negotiated hundreds of apartment rentals, you’ll want to do your research before going at it with a commercial landlord. For starters, commercial lease terms tend to be longer than home rental terms, averaging at about 3 years. The structures of responsibility in commercial leases are also more flexible.
What are the types of commercial retail leases?
Depending on the type of lease you agree to, your rental suition could range from paying a smaller base rent but be responsible for costs like utilities, maintenance, and taxes to paying a premium to have the landlord take care of all financial responsibilities.
If you’re a brand new retailer, paying that premium may actually be smarter as it allows you to budget efficiently.)For more clarity, Clint Gharib offered insight on the four main ways that commercial leases are structured in Forbes:
- “Single Net Lease, Net Lease: tenant only pays utilities and property tax; landlord pays maintenance, repairs and insurance.
- Net-Net, or Double Net Leases: tenant is responsible for only utilities, property taxes and insurance premiums for the building; landlord pays maintenance & repairs.
- Triple Net Leases: tenant responsible for all costs of the building, except the landlord is generally responsible for structural repairs.
- Full Service Gross, or Modified Gross Lease (also called modified net lease): split structural repairs and operating expenses (property taxes, property insurance, common area maintenance (CAM), and utilities) between the tenant and landlord called ‘base rent.’”
It’s important to note, as well, that you will likely have the most negotiating flexibility on the lease structure with an independent landlord, as opposed to a corporate one. (In malls, for instance, it’s typically difficult to negotiate even base rent, much less the structure. At a mall, it’s all about negotiating perks.)
All this to say, when it comes to a retail lease, there are a lot of little things that can be negotiated and requested to make the lease turn out in your favor. And remember, some of the smaller details can either make up for a higher base rent than you wanted, or you can use them as tools to lower that base rent.
How to negotiate a commercial lease for your retail store: 15 tips
1. Settle ahead of time on your budget, your must-haves, and your nice-to-haves.
The very first thing you need to do (before even looking at locations) is to settle on your exact budget, what things you absolutely must have, and what things would just be nice to have. For instance, you probably want to be able to sublease should things go belly-up (particularly if you’re brand new), but you may be able to forego free parking. Those nice-to-haves will end up being your negotiating chips.
2. Get an agent or lawyer to negotiate for you.
Before jumping in headfirst, you may wish to get an agent to negotiate your lease for you if it’s within your budget. Agents, after all, are experts. They’ll be able to get your deals and clauses that you may never have noticed. Find one here.
3. Do negotiate on more than one location at the same time.
To negotiate from a place of strength, you should do it on more than one location at the same time. This will give you the ability to walk away from at least one of the negotiations, putting you in a better position.
4. Don’t pay asked base rent.
Landlords ask for a rent up front that is the maximum amount of rent they think a tenant might agree to pay. But landlords don’t actually expect anyone to agree to that amount. Come in with your counter offer at 10-15% beneath what they’re asking for. After that, you’ll typically be able to work out a number in between that works for both of you.
5. Check the square footage yourself.
Space measurements can get out of date easily, as each commercial tenant tends to change the space to suit their needs. You’re renting the usable space, and that square footage may have shrunk significantly. It’s also not entirely unusual for landlords to include in the square footage parts of the common area of a building or to simply inflate the square footage.
The exact square footage is important because commercial rent is paid by the square foot. You don’t want to be paying for square feet you can’t use. Measure the space yourself and if it comes up as smaller than what the landlord is claiming, you’ve got yourself a discount on rent.
6. Get better base rent by negotiating a longer lease term.
Your goal of base rent negotiations is to achieve the minimum lease length with the maximum benefits. Work with your landlord to figure out what they’re willing to give in exchange for committed tenancy.
A method that may help you here is to negotiate future renewal options. If you can’t get exactly what you want by committing to a full 3-year lease, you may, for instance, be able to compromise on a 2-year lease with an option for renewal with a very low rent increase. (As a note: you should negotiate on the renewal options anyway. Getting future rent increases capped is always a good idea.)
Again, brand new retail businesses may find themselves better off accepting the higher price of a short-term lease the first time around, while focusing on getting favorable termination and subleasing clauses for peace of mind.
7. Look for free rent.
Free rent is a popular promotion for landlords and it can also be a great compromise on a rent discount. A landlord may not wish to lower base rent because it could lower the value future tenants are willing to pay, but they may still be willing to give you a discount via free rent periods. On a 3 year lease, a single free rent period per year will result in a total of an 8.3% discount on rent, for example.
Tip: When negotiating free rent periods, ensure that all other expenses (maintenance, utilities, etc.) are also waived that month.
8. Ask for a fair “cure” period.
A “cure” period is the time period you are given in order to rectify breaching the lease. The most common example is being late on rent payments. Without a cure period, you may be subject to paying fines or legal action for something as simple as forgetting to pay rent for a single day. You don’t want a fairly small mistake like that to end up getting so out of hand. So don’t sign the lease until you have a cure period written in. A cure period should be one of your non-negotiables, especially because most-all landlords are happy to agree to one.
9. Negotiate lower early termination penalty fees.
Everything’s negotiable, even those early termination fees. New retailers may find that it’s worth fighting to lower these fees in order for peace of mind.
10. Add a sublease clause.
A sublease clause is good to have added in either in addition to or instead of lower termination fees. Should you need to move to another space, subleasing will allow you to recoup lost rent.
11. Have a co-tenancy clause written in.
A co-tenancy clause is a clause which allows you to break your lease should a major tenant that drives business to you in the same multi-tenant building move. This especially comes into play for small retailers operating in a strip mall with a popular retail behemoth like Target or Walmart. These big box stores may provide the initial attraction to your location and ultimately drive a lot of traffic through your doors. If you’re leasing in a situation like that, you want to make sure that you can break your lease if something happens to that big store.
12. Include a clause preventing your landlord from renting out space in your building to a competitor.
Requesting to have a clause written in preventing your landlord from renting to the competition can be a smart idea. It can also be a good nice-to-have that you don’t mind negotiating away for something better.
13. Pay attention to the HVAC responsibility.
The responsibility for the space’s HVAC system is small detail that could end up costing you thousands. See if you can turn that responsibility over to the landlord. And failing that, you can get caps set on your per year out-of-pocket on the system.
14. Haggle over the fixturization period.
Chances are, you’re going to have to redo the space somewhat to fix it up for your store. It may be a simple as hanging a few things or it may be more intensive. Either way, you shouldn’t accept the responsibility to pay for the work and the rent of the space at the time. Some landlords may opt to redo the space for you – provided you’re paying rent. Others, however, may prefer you redo the space yourself, but be willing to provide free rent during the fixturization period. (For intensive changes, you should seek for up to 120 days of free rent to allow for permits to be obtained and then for construction to occur.)
15. Negotiate for all available perks.
As mentioned earlier, it may be hard to haggle with a corporate landlord over certain things like the base rent and lease structure. But corporate landlords will offer other things that you may be able to get for free, such as free employee parking or wi-fi. And those perks could save you quite a bit of money in the long run, so don’t settle just because the landlord makes it seem like nothing can be negotiated on. That’s just their opening tactic.
16. Carefully negotiate your “force majeure” clause
The force majeure clause is a part of a lease agreement that stipulates the situations in which landlord or tenant obligations can be delayed or excused. Most force majeure clauses cover exceptional and/or unforeseen circumstances, such as act of God, strikes, war, labor disputes, etc.
But as what many commercial tenants found out in 2020, force majeure clauses apparently don’t typically cover government-sanctioned lockdowns amidst a global pandemic. Many businesses found themselves in disputes with landlords over whether or not they should continue paying rent during periods when they were forced to closed.
You can prevent these situations from taking place by negotiating (or renegotiating) what force majeure entails.
The legal website Nolo recommends clarifying the range of obligations that the clause excuses, as well as ironing out the definition of “force majeure”.
According to the site, “The definition of a force majeure is one of your most important considerations. When the clause will relieve you of your responsibilities, you’ll want it to be as broad as possible.”
Defining a force majeure as any act, event, or circumstance beyond the party’s control, that wasn’t caused by that party’s negligence or failure to exercise due care, gives you a far-reaching clause. Common examples of listed events are set-out above, in “Acts of God.”
Some clauses recite the specific acts noted above, then end with a catch-all definition, like “…or any other events not within the reasonable control of the party affected.” But because the catch-all is so vague, a court might not enforce it, making it useless. To forestall this result, you can include a phrase preceding the enumerated events that makes it clear that these events aren’t the only ones that can constitute an act of God: “…including but not limited to [listed acts].”
Negotiating a lease can be daunting, but as long as you give yourself plenty of time to negotiate the lease before you need the space and negotiate on multiple locations at once, you’ll be operating from a place of strength. You likely won’t get everything you want, but you can certainly get everything you need.
About Francesca Nicasio
Francesca Nicasio is Vend's Retail Expert and Content Strategist. She writes about trends, tips, and other cool things that enable retailers to increase sales, serve customers better, and be more awesome overall. She's also the author of Retail Survival of the Fittest, a free eBook to help retailers future-proof their stores. Connect with her on LinkedIn, Twitter, or Google+.