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OPERATIONS

Negotiating a Good Lease
 

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Almost all small businesses start out in leased premises; many use leased space throughout the life of the business. By leasing rather than owning, you avoid tying up valuable working capital. And it's easier to move to new quarters if your space needs change.

When you get serious about an available space, chances are you'll be presented with a typed or printed lease prepared by the landlord or the landlord's lawyer. Rule 1 is to understand that the terms almost always favor the landlord. Rule 2 is to know that with a little effort you can almost always negotiate significant improvements.

Obviously, one big issue to consider is how much rent you'll pay. Commercial space is usually priced by the square foot and figured by the year; $20 a square foot, for example, means $20 per square foot per year. Space is sometimes priced by the month; $1.60 a square foot would mean $1.60 per square foot per month, or $18 a square foot figured yearly. Either way, it's sensible to check out rates for comparable spaces and ask for a reduction.

When you're shopping around, look carefully at who is required to pay taxes, insurance, repairs and utilities. With a "gross lease," you pay for none of these. By contrast, with a "triple net lease" you pay for them all - potentially a large sum. In fact, the best approach may be to pay a relatively higher amount for rent in exchange for eliminating these extras.

But don't just focus on what you'll pay each month. Other concerns can be more significant. For example, if you'll need lots of improvements (called build outs), you may want to use the lion's share of your bargaining power to have the landlord provide them at no cost to you. Or if your move will be costly, resulting in a temporary cash flow problem, you may want to ask for a few months of reduced rent.

Your negotiating power on these and other issues depends on whether your local rental market is hot or cold. If plenty of commercial space is available, you can probably win many landlord concessions. If your area's rental market is tight or you are after a unique space, you'll have considerably less leverage.

One area of the lease you should always focus on is its length. Occasionally, a small business that's just starting out wants a month-to-month tenancy, permitting the tenant to move on with 30 days' written notice. The majority of small businesses, however, prefer the protection of a written lease that lasts a year or more.

If your business isn't particularly location-sensitive (a mail-order business or software testing lab, for example) and plenty of commercial space is available in your area, a short-term lease probably makes the most sense. Even if the landlord doesn't renew your lease, finding comparable space won't be a problem.

But if you have found an especially favorable location for a retail shop, restaurant or other business where location is key, deciding on how long a lease to ask for is far more problematic. If your business does well, you'll want the right to stay on for an extended period. On the other hand, you're probably nervous about signing a four-year lease in case your business goes kaput.

A good solution is to bargain for a short initial lease with one or more options to renew - say a one- or two-year lease with an option to renew for two or three more years. Typically, an option gives you the right to exercise your option to stay by notifying your landlord in writing a certain number of days or months before the lease expires.

If you ask for an option, expect the landlord to want a higher rent for the renewal period. If the property is particularly desirable, the owner may also want an extra fee in exchange for giving you the choice to stay or leave.

Copyright 1999 Nolo.com Inc.

Last updated: Oct 20, 1999




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