by: Peter D. Morris CRX, SCLS, SCSM, SCMD
Greenstead Consulting Group
Specialists in Commercial Real Estate Training and Consulting
Entire books and courses can be written about this step alone. I know, because I have written them and teach them. However, this will give you a brief overview of some of the key negotiating points I think are important.
First, remember that negotiating leases IS the landlord’s primary business. For you, negotiating a lease is only one part of your overall business strategy and you may be tempted to rush this step in order to occupy the space as soon as possible. After all, there have been seven long steps just to get to this point and you are excited to get open in the space. I completely understand that. But unless you are completely armed with how to negotiate a lease correctly, the landlord has the leverage.
This is the point where you will gain long lasting value for your business if you are successful in your negotiation. Bad negotiating here can cost you your business.
There are a lot of negotiating techniques and processes you can use. The negotiating process itself consists of several steps, depending on the property, your business and the landlord.
Generally speaking, the process consists of negotiating the basic financial terms of the lease including the minimum rent and any other types of rent; negotiating the length of the lease; negotiating the lease wording clause by clause; and, negotiating any landlord’s work and provisions they agree to undertake.
The landlord may provide a non-binding letter of intent or memorandum of understanding that lays out the basic business deal. The reason for the letter of intent is to guide the negotiation and memorialize the discussions to date. That doesn’t mean the negotiation is over. From here the negotiation turns to an offer to lease and lease or directly to the lease itself. It is important to remember a number of things as you go into the negotiation. They are:
· The lease will guide your business relationship with the landlord. The landlord’s objective is to transfer as much of their business risk as possible to you. Your objective should be to reject that and, where possible, transfer your risk to the landlord. You are the landlord’s customer.
- Never sign the lease as it is presented to you. Every word is open for negotiation.
- The Offer to Lease is legally binding so make sure your lawyer assists you at this stage, not later.
- If a point in the lease is not clear, don’t agree to it. Every point in the lease needs to be crystal clear to avoid issues later.
- Enter the negotiation armed with your criteria and your aspirational expectations.
- Never negotiate below your “Must Have” requirements, as noted in a previous post.
Many business people stop being engaged in the negotiation process once the offer to lease or lease is sent to them, preferring to hand it over to their lawyer so the businessperson can on with the remaining steps in the leasing process. This is a mistake you shouldn’t make.
Your lawyer is your advisor. They should not be a substitute for your involvement in the negotiation process. They will not have to live with the lease or the space for the next 5, 10 or more years. Don’t misunderstand me, a top-notch lawyer who specializes in commercial real estate leases is a vital member of your team and you should pay attention to their advice. But you also need to be involved in the transaction throughout, because you know your business better than any other advisor.