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Negotiating a business premises lease
Before signing a lease, you have the opportunity to negotiate with the landlord (or their agent) to reach an agreement that meets your business needs.
Although a lease may be presented as 'standard' you can still negotiate changes to this type of contract if required. It is important to understand and consider some key leasing matters before starting negotiations.
You should seek financial, legal and business advice before entering into a lease so that you understand your rights, liabilities and obligations.
Each participant in lease negotiations will be seeking to gain something different. Understanding what each participant's interests and goals are, may help find a mutually acceptable solution.
Tenant/lessee: The business tenant or lessee will seek leasing conditions to ensure their business operation is profitable, including paying for access to the services and support they need. They will usually seek transparency and a level of control over any potential changes that could affect their profitability or operations.
Landlord/lessor: The owner of the property will generally seek optimum rent, minimum expenditure and payment of all expenses by the tenant. Landlords/lessors will usually seek a watertight lease which ensures their rights are fully protected.
Letting agent: They are engaged by the landlord to find and evaluate potential tenants and when the tenant has entered into a lease, receives commission from the landlord.
Managing agent (may also be the letting agent): They are engaged by the landlord to carry out various duties as agreed with the landlord. This might include conducting inspections, corresponding with the tenant, receipting the rent and outgoings, and monitoring for and reporting to the landlord about any breaches of the conditions of the lease.
Landlord's solicitor: They are engaged by the landlord to provide appropriate leasing documentation and legal advice to the landlord. Some leases may include clauses that the tenant must pay for any 'reasonable' legal expenses.
What can be negotiated
Price is often perceived as a starting point for many negotiations. Before going to the negotiating table you should know your 'bottom line' (the maximum price you can afford to pay). However, a skilled negotiator will first explore the wider opportunities to improve the overall package in a lease by negotiating better terms and conditions.
There is a lot that can be negotiated besides rent that can impact the profitability of the business, including:
- protection from competition; this is particularly important if the premises are in a shopping centre or group of shops owned by the same landlord
- security of tenure for the desired time
- permitted use (i.e. what you can sell, provide or make on the premises), especially if you are considering adding new products or services
- an affordable rent for the duration of the lease
- the outgoings payable and when they are due
- provisions (clauses) that will not interfere with the day-to-day running of the business or impose excessive financial burdens
- the ability to operate a profitable business.
The choice and sequence of issues for discussion is an important element of the negotiation. It is usually wise to start with an issue that is not too important so that you can afford to make a concession and thereby show readiness to compromise.
If you are not entirely comfortable with the proposed lease be prepared to say no.
Read more about strategies for negotiating.
Get help from experts
The back and forth discussions about the conditions, terms, duration and costs associated with a new lease or the extension of a current lease are all part of commercial negotiations. Disagreements on these things during negotiation doesn't mean the participants are in a dispute. Disagreements on what terms end up in the lease are a normal part of any commercial negotiation.
Negotiating does not come easily to everybody and it's a skill that can be developed over time.
Read more about negotiating successfully.
If you're not sure how to navigate a disagreement on some of the terms, you are not used to bargaining or not knowledgeable in the area of leasing, some outside help may be worth considering. For example, you may wish to be represented during any discussions.
Experts in negotiating commercial leases exist and can complement the advice from financial or legal experts. In some cases, tenants' agents may include legal or financial advice as part of their service.
Read more about working with business advisers.