Negotiating the Business Terms of the Commercial Lease
Although it would be nice, it’s highly unlikely that a commercial landlord will hand you a proposed lease with correctly worded and perfect terms and conditions. As we explain in our new book, Negotiating Commercial Leases & Renewals FOR DUMMIES, it is likely that you will have to negotiate many of the primary business terms critical to your business success. Here are a few things that franchise tenants should not ignore:
Choosing between an Offer to Lease or Letter of Intent: Franchise tenants, landlords, and agents often use these phrases interchangeably, but these initial lease documents are different. A Letter of Intent (or LOI) is often shorter and is non-binding to either party. An Offer to Lease is, typically, more in-depth and is binding – subject to conditions by the landlord and tenant. Given a choice, The Lease Coach recommends using an Offer to Lease rather than an LOI. An agent may try to sway you otherwise with the argument, “It’s non-binding … what have you got to lose?”. The truth is that you can have a lot to lose if you send in a hurriedly composed and/or poorly thought out LOI or sign an LOI that is unfair to you.
Determining the Parties to the Lease Agreement: The landlord’s corporate identity is usually well-established; however, yours may not be. The Lease Coach recommends that you not list your personal name on the agreement (as you will become personally responsible for any future losses). Instead, form a corporation or LLC for your business. Establish your corporate identity ahead of the negotiation process and have it ready to use on all correspondence because this name that you use on the Offer to Lease will carry over into the formal lease agreement, unless noted that it will change.
The lease term (or length): The majority of commercial lease deals are five-year lease terms; however, exceptions have become more commonplace. The Lease Coach frequently negotiates three-, seven-, or 10-year lease terms. A lease term can be stated in either months or years. It’s important to factor in the start and expiration dates of the lease term relative to what’s best for your business. Franchised commercial tenants should make sure that their lease term matches their franchise term to avoid issues with the lease term. This happens when the start date of the franchise agreement is prior to the start date of the lease agreement – which may be several months later, when the franchised business actually opens.
Listing the Base (or Minimum) Rent: Base rent is the portion of the rent payable to the landlord, excluding operating costs, and is the most negotiable portion of the rent you pay. Most North American landlords calculate their rent per square foot per year; however, rent is calculated per square foot per month throughout California and parts of the western United States. Calculating your total base rent is easy – take the number of square feet and multiply it by the annual rent per square foot to equal your annual base rent. By dividing the annual base rent by 12 (months), this will equal your monthly base rent for your tenancy.
There are, of course, many other business terms in a commercial lease. Don’t overlook any of the following:
- The amount of tenant allowance and/or free rent
- The amount of operating costs (Common Area Maintenance / CAM charges)
- A list of the landlord’s and the tenant’s work to be done
- The amount of the lease deposit
- Conditions (these can include business permits, including zoning; construction estimates; financing; inspection of the property / premises; partner / franchisor approval; and satisfaction with the formal lease agreement)
- Assignment Rights
- Days and hours of operation
- Expansion right
- Personal Guarantees
- Termination rights