How to Negotiate a Better Lease
If there's any silver lining to our dark economic cloud, it has to be the attractive leasing deals many business tenants are enjoying around the country. Here's how you can take advantage.
Phillip M. Perry (Oct/Nov 09)
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Do Your Homework
That phrase -"checking around the market"- holds the key to your success in a lease renegotiation. "You have to do your research and line up your ammunition," says Kahan. You will want to answer two questions: What rents are others paying? And what space is available for you to move to?
With the answers to those questions in hand, you can approach your landlord with a little more power. And one more thing: Show your own numbers. Today, more landlords are having to take into account what a tenant can afford to pay. "Be prepared to show your sales figures," says Kahan. "Landlords will ask how much you are doing."
There's more, says Kahan: Have a strategic plan. "Landlords will also ask `what will you differently?'" she says. "Show how you can do a better marketing job with the money you save with the rent. It's all about planning. Things don't happen on their own. You have to work hard and do your homework."
Win a Better Deal
As you pursue your own lease renegotiation keep these tips in mind:
• Favor shorter terms. Don't get roped in for a long period of time. Instead of a five- year lease, try to get a two-year lease with the option to renew for successive two-year terms. That will save you from a big bill if you go out of business and you are responsible for the remaining months of a long lease.
• Obtain the right of first refusal. Make sure your lease includes a "first right of refusal" clause. This gives you the right to decline a renewal before the landlord offers the space to someone else.
• Consider a "blend and extend." If you have two years left of a five-year lease, try getting some immediate rent relief - in terms of free months of rent or a lower monthly rate - in exchange for signing a new five-year lease, provided you feel assured of your ability to fulfill a long-term contract.
• Find an alternative location. Get a better seat at the negotiating table by having a fallback space if your landlord balks at a deal. You can say something like this: "Look, we have a brand new deal at a new location, where those guys will pay for us to be there. Or we can do a deal with you at this new number."
• Obtain termination powers. Try to get an agreement where either party can terminate the lease with 90 days notice. Landlords don't like it, but in this market, it's easier to negotiate exit strategies.
• Watch your annual increases. An annual rise of 3 percent seems to be the industry standard around the country. A landlord might ask for a 4 percent increase in exchange for funding some improvements in your space.
• Don't rely on oral statements. Do things in writing by certified mail and keep copies of everything. Do not rely on what someone tells you. If the landlord says, "Don't worry about rent this month," say, "I want something in writing for my records."
• Beware of personal guarantees. Try to avoid personally guaranteeing the payments on your lease. A landlord can go after your own assets if your business fails. A struggling tenant who sincerely wants to pay can look attractive in this market. Landlords are falling on hard times, too. And no one wants to pursue a lawsuit against a vanished tenant: Landlords have very little to gain by going after a tenant who is unable to pay. Lawsuits are expensive, and collections after a favorable verdict are difficult.
So how urgent is the need to take advantage of the market? Seize the day, but don't expect a quick sunset. "Given the expected slow pace of the economic turnaround, good deals are going to be with us for awhile," says Bach. "They should be around through the first half of next year."