You have made the decision to lease space to operate your business. Congratulations. Perhaps you have just started a business. Or, you have outgrown your current space or home office and need something larger. Perhaps you need to downsize to manage overhead when profits are down. Maybe your lease term is expiring soon and you want to renew. Whichever your circumstance, unless you have sufficient capital to purchase commercial space (which is probably better left in reserves to cover cash flow deficiencies), you will need to negotiate a commercial lease. Here are some common myths to set you on the right path.
The Commercial Real Estate Lease Negotiation Myths
Real Estate Negotiation Myth #1: Leases are Standard Forms Which Are Not Negotiable. False. Landlords may very likely use “standard” or “boilerplate” forms in commercial leases they present to prospective lessees. But there are no “standard” lease forms under the law other than what attorneys have drafted for the landlords and landlords and tenants are by and large free to contract as they please with regard to commercial space. If the landlord or their broker tells you differently, you are more than likely being misled. The only exception is if the landlord is restricted by promises they have made to other tenants (such as not allowing a competing or like business in the same strip mall), lender requirements (if the landlord has a mortgage on the property), or insurer requirements (mandated by the insurance company insuring landlord’s property). Feel free to ask for changes to the lease you are not comfortable with. If the landlord says they cannot change their standard lease, ask them why and carefully evaluate the truthfulness and reasoning of their response.
Real Estate Negotiation Myth #2: Personal Guarantees are Required. Not always. Landlords want to make sure that in the event the tenant defaults on its lease, that the landlord will still get paid. So, most landlords will “require” a personal guaranty on the lease, which is similar to a loan co-signer guaranteeing payment if the tenant fails to pay rent as agreed. If a default occurs, the guarantor (usually an owner or officer of the company) is liable for the entire amount of the lease. Many landlords have been burned by tenants who stop paying rent, then refuse to move out, then file bankruptcy to stall any eviction proceedings, sometimes occupying a space for months or even years without paying rent. The landlord must incur substantial legal fees for unlawful detainer counsel and possibly to dispute a bankruptcy request for stay while not collecting rent or having the ability to get the space ready and show it to new prospective tenants. One way to get around this so-called requirement is to show the landlord that your business has good credit, solid financials, substantial cash reserves, or a long history as a good tenant either with the same landlord or another reputable landlord in the community that can be used as a reference. Give the landlord confidence that your business is not a default risk and you can likely avoid having an owner or officer guaranty the lease.
Real Estate Negotiation Myth #3: The Lessee is Responsible for Tenant Improvements. Not Necessarily. Most of the time, a landlord will need to conduct some sort of construction before your business can occupy the building whether it’s as simple as new flooring and paint or as complex as knocking down walls and building out new offices necessitating electrical wiring, plumbing, permits, etc. Whichever, the case, know that the tenant improvements are a cost of doing business for the landlord whether the tenant pays for them or not. Almost always, a landlord can be persuaded into rolling the cost of the tenant improvements into the monthly cost of rent over the lifetime of the lease, which lets your business preserve much-needed cash. At best, the landlord will cover the TI’s in full to incentivize the tenant to lease the space.
No Substitute for Attorney Representation in Lease Negotiations
Your ability to negotiate a lease will also depend on external factors such as the current commercial real estate conditions in your local area. The more the landlord wants or needs to rent the space, the better position you as the tenant are in to negotiate. Of course, the only way to ensure you are getting the best deal on your commercial lease is to retain a skilled and experienced real estate attorney to represent you in the transaction. Your lease is too important a contract to enter into without proper representation.