How Much Leverage Do You Have?
A commercial lease negotiation is like any other negotiation – there is some “give and take” involved. The amount of “giving” that you, as a tenant, may need to do is based on the following factors:
1) How much leverage you have as a potential tenant (i.e., how badly the landlord wants to have you lease its property) and
2) How well you recognize (and successfully modify) those provisions in the lease that do not operate in your favor.
So, in determining how flexible you will be in the negotiation, you must know both your value as a tenant and what the lease would require of you. If the landlord is eager to have you as a tenant, you will, obviously, have more bargaining power. If your business is one that is likely to draw significant traffic or the type of clientele that the landlord desires, the landlord will be much more inclined to work with you in establishing lease terms.
If, on the other hand, your business is not one in which the landlord has a very strong desire to have in its space, the landlord will be inclined to stick as closely as possible to its standard lease provisions. The vast majority of the time, those standard lease provisions are going to be in the landlord’s favor. In determining whether to negotiate modifications of certain language presented to you in the lease, you must either understand the lease language or hire professionals (like us!) to help you understand the lease language. If, for example, you have been told that the lease will be a net lease with monthly rent of $2,500, you may not realize that the $2,500 is the minimum amount you pay. There will be a slew of other charges for which you would be responsible (e.g., common area maintenance, taxes, insurance, marketing), which could easily make your monthly expense several hundreds of dollars more than what you might expect.
When you approach your lease negotiation, have a realistic view of your own bargaining power. That will serve as a gauge for you in knowing where you’re willing to be flexible and where you are not. We’ll talk about specific lease provisions in Part II.
An assignment clause is a provision in a lease that governs a party’s ability to transfer the lease to another business, person or entity. In a typical commercial lease, the landlord has virtually limitless rights to transfer its interest in the lease, while the tenant, on the other hand, has limited rights to transfer its interests. The standard language in most leases is “Tenant may not assign the Lease” or “Tenant shall not assign the lease without Landlord’s prior written consent, which may be withheld at Landlord’s discretion.” Obviously, this lease language puts significant restraints on what a tenant can do while leasing the space.
Commercial leases usually have a term that spans several years – 5 years is common – and during that time, your business needs may change. You may need more space or less space; you may decide to sell your business or add a partner. This is where the language in the assignment clause becomes critical. This clause governs your right to find a replacement tenant for the remainder of the term of your lease.
We advise Final Eyez clients to negotiate the assignment provision to give flexibility to the tenant as the years pass. Instead of agreeing to text that states that the landlord may approve or reject a transfer “at Landlord’s discretion,” request the right to assign with Landlord’s consent – consent that cannot be unreasonably withheld, conditioned or delayed.
The assignment clause can also include conditions to Landlord’s consent, dealing with excess rent and fees to be paid to Landlord for each request. All terms are negotiable, so do your research to make sure you are in the best position possible, should the need to assign the lease arise.
Subleasing is often included in the assignment clause. It has different legal ramifications. We will cover subleasing in a later blog entry! In the meantime, think about your specific business needs and how the assignment provision in your lease is either working for or against you.
So let’s get started . . .
Lease Negotiation Tip #1 – The Use Clause
Most commercial leases contain a use clause. The use clause is a provision that states the purpose for which the tenant may use the leased space. This clause can range from very general to very specific. For example, a common general use clause will state, “The Premises may be used for any legal purpose.” A more specific use clause provision may read, for example, “The Premises shall be used for the operation of a salon providing hair care and aesthetician services. The Premises shall not be used for the retail sale of any beauty and/or hair care products, except that Tenant may utilize space in the front of the salon, not to exceed an area of 25 square feet, for the sale of the products of Tenant’s choice.”
When negotiating your commercial lease, be sure that you make the use clause as general and vague as possible. This allows you flexibility in the products and services you provide as your business grows.
In each of the next several blog posts, we will present to you a suggestion for you to employ when negotiating a commercial lease. These posts will cover renewals, the Use clause, the Assignment clause, CAM (Common Area Maintenance) and lease options. For the vast majority of tenants, these items are of critical importance when establishing rights under a commercial lease. Through our years of experience, we have found that these areas, when handled improperly, can detrimentally impact a business’ bottom line to the point of causing a complete business failure. Since we’re in the business of helping small businesses succeed, we are glad to provide advice on how to strengthen these areas in your lease so that they operate in your favor.
As we move through the various topics of discussion, feel free to pose any questions or share any experiences – positive or negative – that you have had in relation to the subject.
The approach of the Thanksgiving holiday signals that the end of the year will be here soon. The next several weeks tend to be a time for reflection on the past year – what went well and what did not – and a time to set goals for the next year.
When assessing the successes of last year and planning for the year to come, think about how you can streamline your operations. Consider what it was that you spent far too much time on this year, that could have been delegated and more efficiently performed by someone else. Did you spend too much time doing X, when your forte is really Y, and you should have simply hired someone to take X off your plate? Did you squander away creative energy trying to figure out how to handle some matter in which you have no expertise, only to find that you could have saved yourself some aggravation if you had someone else take on the task for you?
Don’t forget that a critical part of the success of any small business is it running efficiently. Focus on what you know best – outsource the rest. When the time comes for you to negotiate (or renegotiate) the commercial lease for your space, outsource to the best source for commercial lease expertise – Final Eyez Lease Consultants. www.finaleyez.com.
We’re delighted that Final Eyez Lease Consultants has come to fruition! This is a service that has, literally, been twenty years in the making (even though we didn’t realize that during our early years in the industry). We’re so glad to be able to present to you a service that is informed by two decades of highly specialized commercial lease experience – a service that allows us to use what we know to save our clients time, money and aggravation.
We’re looking forward to being advocates and support professionals for entrepreneurs and service providers all around the United States. In the most user-friendly means possible, we set out to empower tenants with the tools and information needed in order to create the most favorable commercial lease possible.
Landlords, you are officially on notice. Final Eyez is here and we’re about to make the playing field more level!