"A business space lease is one of the most one-sided and unfair
pieces of paper in existence." (1) So says New York broker Harold Wagner. He
should know. Termed a "boy wonder" by the New York Times, Wagner was involved in
some of the city's largest commercial real estate deals before becoming the
founder and principal of the tenant-oriented Wagner Group Associates.
(2)
A bad lease can destroy your operation. You'll have to live with
its terms for a long time, so it's important to get what you want. "The standard
lease is always written in the landlord's favor," insists national real estate
consultant B. Alan Whitson, located in Newport Beach, California. "[It's up to
you] to negotiate better terms." (3)
Most business folks only think about a low price per square foot
when they negotiate for space. But rent is just one aspect of a commercial
lease. Here are seven other points to keep in mind:
1. RECIPROCITY OF OBLIGATIONS, OR TIT FOR TAT. The owner of a
tiny shopping center decided to re-pave his parking lot -- then immediately
billed each of his tenants for one-fifth of the $20,000 cost. (4) Ouch1x If you
must pay pass-throughs for major maintenance and improvements, then your
landlord should require your consent to those improvements.
If the lease contains a rachet clause
allowing for rent increases (inflation, cost-of-living), it should also permit a
rent decrease if something make the premises less desirable. (5) What if the
landlord doesn't make necessary repairs? Can you have it done yourself, and
deduct the cost from the rent? (6)
If a contract term can change in the
landlord's favor under certain conditions, it should also change in your favor
if the reverse happens. Look at "Lease Negotiation Tips" at cftech. For more help, check out the
SBA's online library resources at the sba, particularly
their Startup Kit "Getting Started."
2. TIME LIMITS AND REMEDIES. Never sign a document that allows
the other side to complete something "within a reasonable amount of time." For
example, landlord construction or remodeling under commercial leases often takes
longer than first anticipated. Set a definite date for completion. As a
negotiating posture, ask for the landlord's worst-case estimate. Then generously
agree to a date somewhat in excess of that, so he feels comfortable with the
clause. But if things go terribly wrong, you're protected. The lease should also
spell out exactly what happens if the deadline isn't met (rent reduction or
abatement). (7)
3. NEIGHBORS. Who else will be doing business in the same
complex? A video store opened in one southern California shopping plaza. Then
the anchor tenant -- a major grocery chain -- also began renting movies.
Customers found it easier to food-shop and rent a video from the same location
(the supermarket) and the video store's business suffered. Because the video
store's lease contained an exclusive-right, non-competing business clause, they
were able to force the grocery store to close its video department.
(8)
What if your landlord brings in a noisy or smelly tenant, or
some controversial enterprise (tattoo parlor, abortion counseling center)?
Remember, your landlord will probably retain strict control over what business
activities you may engage in, or to whom you can sublet. You should have some
control over your business neighbors. (9)
4. LANDLORD'S FISCAL CONDITION. Your
landlord will want lots of assurances -- from business financial statements to
personal guarantees -- that you can pay the rent. But what if he goes broke? A
doctor moved into a small, privately-owned medical building and spent major
dollars on remodeling and installing specialized equipment. Then a bank officer
showed up to say that they had foreclosed on the building, and the doctor's
lease was void. He could stay -- at twice the original rent -- or sacrifice all
his improvement costs and move out within 30 days. Insist on a standard
recognition of nondisturbance clause to protect yourself from your landlord's
current and future lenders. (10)
5. KNOW THE LINGO & ASK QUESTIONS. Do
your homework on the basic terminology. Learn the difference between gross, net,
and triple net leases. Check out "Knowing the language a valuable thing,"ms
business." Ask the leasing agent
to explain anything that's not crystal clear to you. Asking questions is NOT a
sign of weakness. It helps you discover valuable information. It also gives you
more control over the tone and flow of the negotiations, and is a very effective
deal-making tool. (11)
6. INFLEXIBILITY. Many brokers and leasing agents will tell you:
"This is our standard contract" and "We always use this agreement." (12) Lawyers
reply by saying that only one contract was ever chiseled in stone [the Ten
Commandments]; everything else is negotiable. Narrow down which modifications
are really important to you, and focus your negotiations on these points. If all
else fails, put your proposed lease changes in writing in a short letter. Agents
are required to present all serious offers to their principals. If you can get a
name and address for the property owner, send a copy to her, too.
7. SEEK PROFESSIONAL ADVICE. Commercial
space leasing contracts are some of the most complex legal documents in today's
business world. Fred Steingold, author of "The Legal Guide To Starting &
Running A Small Business," says, "Most attorneys can review a lease in less than
an hour, so it's not a big expense." (13) Spend the money wisely: use a lawyer
who specializes in commercial real estate.
There is also a growing number of sales and
leasing agents who represent only the buyer or renter, such as the single-focus
tenant representation firm of Wagner Group Associates mentioned before. Their
homepage is at itra.
You can get counseling by e-mail through
the SCORE (Service Corps of Retired Executives) Web site at score. The SBA (Small
Business Administration)"Help Desk" provides answers to small-business questions
by phone: 1-800-UASKSBA, 9:00 AM-5:00 PM East Coast time, Monday through Friday.
Take all the advice you can get -- it's never too much1x
For more information, check out the
following resources:
"How To Negotiate A Lease"
"Lease Negotiation Tips"
"An improper lease can destroy your operation"
"Signing a
Real Estate Lease
