Negotiating a fair lease is critical to the success of your business. It is much more than just agreeing on the rental amount you’ll be paying for the next few years. A lease needs to be beneficial to you as a business owner, as well as to the landlord. A well negotiated lease will provide both parties with peace of mind and minimize the likelihood of disagreements in the future.
Understanding your lease
It is necessary that you take the time to read through and fully understand your lease. The document will outline the responsibilities you have as a tenant. Small business owners can end up in messy disputes with the landlord simply because they failed to assess all relevant information, and understand the terms and conditions before putting their signature to it.
What should you negotiate?
Any of the terms and conditions outlined in the lease can usually be negotiated. The primary objective should be a fair agreement for everyone involved. How much leverage you have during the negotiations will depend on factors such as:
- The demand for the premises
- The location
- Vacancy rates in the commercial property market
- The landlord’s needs
- How good you are as a tenant
- Your ability to negotiate
Most landlords are willing to offer incentives such as rent-free periods and fit-out contributions, in order to attract good tenants.
It’s important to negotiate a lease period that is right for you. How long you need will largely depend on your business goals. A long term lease will provide you with certainty that you’ll have a place to conduct your business, but there is also less flexibility if your business changes. Many small business owners mitigate this problem by negotiating an initial lease period with the option to renew for another term – for example, a 5 year lease with an option to renew for another 5 years. Breaking the lease up into shorter periods means the tenant won’t be tied down but will also have peace of mind knowing they can continue to lease the property if they wanted to.
Rent reviews and increases can also be negotiated. You’ll need to make sure the rent is affordable for the entire lease. Knowing how much rent will increase by each year allows you to estimate future costs and ensure you can still sustain a profitable business.
As a tenant, you’ll also want to be protected from competing businesses. It’s essential to negotiate terms that prevent the landlord from leasing to other tenants with similar businesses to your own.
To negotiate a fair deal for your commercial lease, you’ll need to put in time and effort into researching the local commercial property market. Speak to other business owners and look at similar properties in the area to see how much they are being leased for. This will give you an indication of the expected rental cost. Before meeting with the landlord or real estate agent, make sure you know your figures and how much you can afford to pay. By staying within your financial limits, you’ll avoid putting yourself under unnecessary stress.
Keys to negotiating a fair lease:
- Have clarity on what you want before negotiations begin.
- Conduct your own market research to get a good idea of what is a fair price.
- Know how much you can afford to pay.
- Understand the needs of your landlord.
- Know your rights and obligations.
- Enquire about any hidden costs.
- Discuss your rights to sublease the space.
- Negotiate your termination clause. Things don’t always work out, and you might need to terminate your lease early. Negotiating your termination clause may save you from having to pay the full rental for the balance of the term on the lease, and also impact “make good” provisions to restore the property to pre-lease condition.
- Don’t bring your emotions to the negotiation.
Negotiating your lease doesn’t need to be complicated or stressful. The main thing is to make sure that you stay focused during the discussions, do your homework and get everything in writing. You need to understand what is best for you and your business, and be prepared to walk away from a bad deal.
A lease is a long-term commitment. Seeking professional advice before signing your lease will help you avoid problems in the future. Let the team at Moiler guide you along the process of negotiating a fair agreement for your business.
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This document has been prepared by Moiler Partners, an Authorised Representative of Count Financial Limited ABN 19 001 974 625; AFSL 227232 (“Count”) a wholly-owned, non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124 and is for general information only. The presentation has been prepared without taking into account your personal objectives, financial situation or needs. You should assess whether the information is appropriate for your needs and consider talking to a Count Authorised Representative before making any investment decision. The relevant PDS should be considered before making a decision about any financial product. The information is provided as an information service only and does not constitute financial product advice and should not be relied upon as financial product advice. 8 July 2019.