How To Negotiate A Commercial Lease In 2022
4 negotiating tips for small businesses and tenants leasing commercial space
Welcome to 2022; it’s officially a post-pandemic world and the way commercial real estate leases work has changed for many. Retail and office tenants especially have gained some much needed bargaining power over landlords that didn’t exist two years ago.
Disclaimer: Nothing on this website is intended to be construed as legal, financial, investment or relationship advice.
As many small businesses and individuals look for lease space for their business, or consider renewing their existing lease, we are going to explain four negotiating tips tenants should know before they sign a commercial lease.
#1 - The Personal Lease Guarantee
Landlords LOVE the lease guarantee; usually a simple 1-pager slipped in at the end of a lease contract, it specifies that the tenant or another “credit-worthy” person will be promising to pay the rent, in the event your business cannot. Sounds simple enough, right? In cases where a prospective tenant’s business has less than two years of operating history, a lease guarantee is often included by default, whether it’s actually a reasonable request or not.
Did you know that personal lease guarantees are negotiable?
That’s right. While a landlord is out to protect their interests, as they should, tenants have options when it comes to personal lease guarantees; it’s not a binary “yes/no” detail. In the event a landlord really wants a personal guarantee, here are some negotiating “counters” to bring to the table as a tenant:
Providing more proof of the businesses ability to secure the lease, which can be in the form of bank statements, secured future order receipts or other documentation
Increasing the security deposit: If a tenant has the funds available, sometimes a landlord will accept a security deposit of 3-6 months rent, in lieu of a personal guarantee
Early release of guarantee: In the event a landlord still requires a personal guarantee, as a tenant you can ask for it to be put down in writing that it will only be for the first year, or two years, and will then be removed, once you’ve shown a good track record of the ability to pay rent on time
#2 - Rent Increases
We won’t go into the difference between different lease types here (modified gross, full service, etc), but every tenant should look very closely at any increases in rent they will pay over the life of their lease.
Many tenants AND landlords really took a haircut during the dark winter of covid, and are trying to make up for losses, each in their own way
For tenants, rent increase = bad. The
standard old way of handling rent increases has always been to use a straight percentage increase each year of the lease, like 3%, or tie the percentage to the CPI (consumer price index).
But what about the fact that many commercial lease spaces, especially those retail and office ones, have sat vacant for the last year or two? What about inflation? How does all this affect what a tenant should ask for when it comes to rent increases?
The short, one-size-fits-all answer here is, tenants should look for reasonable increases that won’t put their business at risk. For many tenants, this looks like negotiating for stepped increases, instead of “straight-line” increases.
Take the following breakdown as an example. Same starting annual rent of $10,000, and the overall rent paid to the landlord is the same over five years, but the first three years are more attractive to a tenant in the stepped version.
|$10,000 (base)||$10,000 (base)|
#3 - Late Payment Default
Most commercial leases include a clause, or even an entire section, related to what happens if the tenant doesn’t pay rent on time.
Usually, if the rent is not paid by the 3rd or sometimes 5th day of any given month, then the tenant is all of the sudden in (((default))). There is typically a window of a few days after that when the tenant can “remedy” their default, but the landlord has rights; when a tenant enters into default, in addition to large late payment fees, commercial lease evictions happen much more swiftly than residential house leases.
Obviously the best way to avoid all this as a tenant is to pay rent on time. But things happen. Seasonal sales dip below expectations, personal emergencies occur. Any number of things can affect on-time rent payments.
Ways to further protect yourself as a tenant in the original lease terms are:
Increase the “window to default” (if it’s 3 days, ask for 7, or better yet, 30)
Make late payments attractive to the landlord, but reasonable to the tenant (maybe 5% for the first one, then 10% for subsequent late payments)
Add a provision that allows the tenant to be late, up to a certain number of days, a few times a year, without penalty
#4 - Force Majeure
If you’re wondering how to pronounce that, here you go.
We see “force majeure clauses” in about half of the leases we review. The language gives the parties certain flexibility when an “event or effect that cannot be reasonably anticipated or controlled” takes place.
The staples here have always included “acts of God” like hurricanes, earthquakes, war, etc. Some good attorneys have started to also include “pandemic” or biological events in this clause for their leases.
As a tenant, you should also look for, or ask to be added, something similar to the following:
“…any federal, state or local government law, ordinance or order, which would materially affect tenant’s ability to operate it’s business…”
We don’t know what the next big thing is going to be, and as a tenant, having broad flexibility to forego rent payments for a time, or even exit the lease entirely, due to some unforeseen circumstance is a great way to protect yourself.
Need help with a lease of your own?
Check out our Commercial Lease Review where we personally review leases for tenants starting at just $39. Our document review experts look for accuracy and red flags to help tenants understand the terms of their lease.