Negotiating a Lease with Your Potential New Landlord

This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.

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Finding the right space for your business is an exercise in negotiation: assuming you're not ready to purchase a commercial property, you're probably looking at renting an office or a work space. Not only do you have to find a space that will provide you with the location and tools to grow your business, but you also have to convince the landlord to give it to you at a price you can afford.

Room to negotiate

On the surface, it may not seem that renting office space offers a lot of room for negotiation. You look for rentals in your price range, tour the property with the landlord or manager, and sign a lease for the amount advertised.

The truth, though, is that even if you're talking to a management company that can't negotiate on price, there are many opportunities to make your lease a more equitable contract. From exactly what expenses your rent covers to how far the landlord will go to prepare the unit for you, you have an opportunity to negotiate each step of the lease.

If you find that you're dealing with a landlord who tells you upfront that you must take or leave a deal, it's often better to leave it, suggests Stanley Bronstein, a real estate attorney from Scottsdale, Arizona. Bronstein, who has negotiated leases for both landlords and tenants, says:

If your landlord is so strong that they are telling you to take it or leave it (even in this market), my inclination would under most circumstances to tell them to take it or leave it. It is only when a prospective tenant is willing to walk away from a deal that they (the tenant) can negotiate from a position of strength.

Negotiating on price is often the hardest part of coming to terms on a lease. Because a landlord typically must turn around and pay bills for the property as a whole with a certain percentage of all incoming rents — taxes, insurance and, in some cases, utilities — many landlords will stand firm on the rent, no matter how hard you try to negotiate.

It's even harder if you're dealing with a management company, rather than an individual landlord. Management companies often have little say in setting rents: you can either pay what they ask or look for rental space elsewhere. If you look at the prices of comparable buildings in the area, however, and you see a significant difference between the space you're looking at and other properties, you may have some wiggle room.

If the rent is truly an issue, you may be able to negotiate a lower monthly price if you're willing to sign a longer lease. It does depend on the landlord and it can be a difficult choice. Choosing a longer lease can work against you in some cases: what if your business outgrows the space before the end of the lease?

Negotiate the build-out

As long as the rent itself is not at issue, though, many landlords and even management companies are willing to work with you to ensure that you'll be successful in the space you're renting. Many are even willing to negotiate customizing the space you want to rent to your needs.

Many retail and office buildings do not have spaces that will immediately meet your needs; instead landlords work on the assumption that you'll have to improve or, in the case of a new building, finish the space so that it meets your needs. This process, known as "build-out," can be as cosmetic as adding new display cases or as in-depth as rewiring the space to meet specific data needs.

When it comes to negotiating, the key question is who will pay for the improvements needed for the space you want to rent. Some landlords will simply write an allotment meant to cover build-out expenses into the lease. Others will handle getting the work done themselves. You can negotiate how much work will be done to the space or how much money your landlord sets aside for the process. You can negotiate every step of the process down to who will get the fixtures when you move out of the space. It's worth remembering, though, that it can be a subjective process: for instance, if the property manager works with a large number of rental units, he may already have the necessary carpenters or other craftsmen available, at prices lower than you can get on your own. Any allotments are also made with the assumption that whoever does the build-out work is a professional — even if you took wood shop, you probably won't be doing this work yourself.

Potential negotiation points

Other opportunities for negotiation can include every clause in the lease. Bronstein points to the indemnity clause as an example:

Often, leases contain clauses where the tenant is expected to indemnify the landlord if the tenant causes a problem. The leases typically do not contain similar language when the landlord causes a problem. Through negotiation, tenants can often get the landlords to put in similar language that protects the tenant under the appropriate circumstances.

Other items you can negotiate include up front fees and security deposits, signage, insurance provisions, the repairs the landlord will do, and options for expansion space.

It can be difficult to know if you've negotiated the best possible deal, although if it is affordable for your business and gets you the space you need to grow, it's likely a good deal from your prospective. Bronstein says:

While it is unfortunate, we live in a world where you typically won't get something unless you ask for it. The bottom line is that the best deals I've seen from a tenant's point of view come when they've "pushed" the landlord to the point where the deal almost died. You can pretty much bet that if your landlord just about killed the deal (or killed it and then revived it) you've gotten about as good of a deal as you're going to get from that landlord on that particular property.

Talk to your attorney

If you're unsure about any part of a lease, it's worth consulting a lawyer before you sign it. Leases are binding contracts, after all, and it's important to be sure that you've gotten a fair deal before you sign. An attorney specializing in real estate can review a lease, as well as negotiate on your behalf.