Renegotiating a commercial lease can be daunting. At best, the whole process can feel like a necessary evil that you can’t wait to move on from. However, when you cruise through your lease renewal without considering all the terms, and most importantly negotiating them, you are actually damaging your business and hurting your bottom line. As a tenant, you have much more power than you think you do–the key is realizing it and proceeding confidently.
To find out how to make your lease work best for your business, Beauty Store Business spoke with Dale Willerton, the CEO and founder of The Lease Coach and the coauthor of Negotiating Commercial Leases & Renewals for Dummies.
TYPES OF LEASE RENEWAL
There are two different kinds of lease renewals: Either your current lease is expiring and it’s time to renegotiate a new one to remain in your space, or you are midway through your current term but can’t afford the rent as-is. There are steps you can take in both situations in order to reach an agreement that fulfills your needs.
If your lease is expiring and you want to negotiate a lease renewal, make sure your landlord pursues you, and not the other way around. “The tenant is the customer to the landlord,” says Willerton, who cautions against oversharing with your landlord’s team. “Too many tenants will call up the property manager and say they want to make renovations, or ask how to get their lease renewed,” he says. Statements like these can hurt you–the landlord knows they don’t have to work to re-earn your tenancy. Then, they can raise your rent because you’ve already revealed that you plan to stay.
Instead, when a landlord approaches you for a lease renewal, ask questions like: “What are you prepared to do? What incentives will you provide to keep us here?” As Willerton phrases it, “There are lots of other fish in the sea; there are lots of other properties.”
As a tenant, it’s crucial to approach your lease renewal as if you might have to move. “And if you might have to move, do your homework and find out what else is available,” he adds. This all leads us to the crux of making yourself attractive as a tenant, which creates competition for your tenancy.
If you find yourself in the alternative scenario, where your rent is no longer feasible for you, don’t despair. Instead, communicate with your landlord so they understand where your business stands. “It will all come down to your P&L,” Willerton says. “You have to be able to show the landlord you simply can’t afford the rent and you need rent abatement.”
In this situation, being up-front is the best advice. “You’ve got to know what your business is doing if you want your landlord to believe you have a future there,” he says. It’s OK to show your landlord that business is down 7 percent, to clarify where you’re coming from. “Having a bookkeeping sense about you is important,” says Willerton.
Once you’ve established that you need a lease renewal and are beginning the process, proceed with care. There are common missteps that first-time business owners tend to make. “Letting the real estate agent represent you is a big problem,” Willerton says. “If a tenant was having legal problem with a landlord, you wouldn’t share their lawyer, so why would you share their real estate agent?” The agent wants a good deal for the landlord. Even if you get your own agent, both are splitting a commission from the landlord. “So the game is rigged against you,” Willerton adds. “Tenants are often a bit naive and think everyone’s trying to help them, but landlords are trying to help themselves.”
Another common mistake business owners make when entering a lease renewal negotiation is not asking for what they want–or even knowing what to ask for. This is why you must do your research. “Business owners don’t know what to ask for, so they don’t ask for very much,” Willerton says. Although it is common for landlords to offer six to nine months of free rent, many tenants are too afraid to ask for it or don’t know that they can.
Not only should you speak up, but don’t get discouraged if you get turned down–no doesn’t necessarily mean no. “This isn’t a dating situation, this is a real estate negotiation,” says Willerton. “Sometimes you have to ask more than once, you have to ask in different ways or you have to walk away from the negotiating table.”
Having worked with landlords for many years, Willerton has direct experience with this. “You never get their best deal when you’re sitting at the table. You only get their best deal when you’re walking out the door,” he offers. Don’t be afraid you will lose the location or alienate your landlord by negotiating. “You just have to be confident. You have to do your homework,” he adds.
THE DOS AND DON’TS
DO: Start Well in Advance
When you’re about to negotiate a new lease or a renewal, you want to give yourself enough time from start to finish, without ever having to rush through it. “Start well in advance,” says Willerton, who explains that the entire process usually takes much longer than the tenant realizes. “The tenant wants to get it out of the way. It’s a nuisance. But for the landlord, all they do is make deals. So they’re prepared to go 10 rounds.” Starting early will also allow you to better assess your needs to find exactly what you’re looking for.
DO: Negotiate on Multiple Sites
“These are the most important words I can say,” Willerton begins. “The average entrepreneur finds a location, falls in love with it and focuses on it 100 percent. Consequently, they don’t create any traction or competition as a tenant,” he explains. “What I say to my clients is, even if you’re renewing a current lease, give me two or three other locations ... that you would consider moving to if this other deal didn’t work out. If I can create a bidding war and position one landlord against the other, then they are competing for your tenancy,” he says. The main takeaway is, that as a customer, you have a choice. Negotiating for multiple sites at the same time is what gives you leverage over your landlord.
DO: Research the Area
You should always find out about the tenants, both current and former, in an area you are considering. Don’t just find out who they are, follow up and ask questions about their business. If they left, was it because business was poor in that area, or did they just move to a different property? The answer could reveal issues that would affect your chances of success. “The average tenant does almost no homework,” says Willerton. “They don’t know how well the building is doing or how well the property is doing.” Though you may not know this information, the landlord does. It’s your responsibility to find out by asking questions.
DON’T: Miss the Chance to Speak Directly with the Landlord
A typical agent will create a barrier between you and the landlord, so you never even speak directly. “My strategy is to bring the tenant and the landlord together,” says Willerton. You want to familiarize yourself with the land- lord’s personality before you sign your lease. Don’t ever question whether it’s inappropriate for you to talk to the landlord–a good landlord should want to talk to you.
“If they won’t meet you now, during the courtship, are they really going to meet with you when the roof is leaking? There are signals and we have to respect them,” says Willerton, who encourages going with your gut.
On the other hand, don’t let kindness blind you. “It’s easy to misinterpret the signals,” he adds. He cautions against thinking, “They are treating me so well, I might as well sign.” Don’t gloss over the facts–though the landlord is actively courting you as a tenant, ask yourself if this area is the best location for your business.
DON’T: Let Your Lawyer Negotiate
While it’s often in your best interest to hire a lawyer to review your documents, you should not let a lawyer nego- tiate the terms. “My personal experience is, most lawyers are not great negotiators,” he says. It’s important to know when and where to employ legal help, and not use a lawyer as your crutch throughout, adding, “Landlords see lawyers as deal killers, not deal makers.”
DO: Consider the Details
When going through the lease renewal process, it’s important to consider all details. “Make sure you negotiate your parking, signage and your permitted-use rights because these are things tenants take for granted. All of this needs to be written down,” says Willerton, who cautions against being too casual with your lease. A lease agreement can be anywhere from five pages to 55 pages, but in general the longer the lease, the better. “You want a lease agreement to cover all the bases,” he explains. If you own a salon or will be renting out chairs, it’s also important that your landlord understands this, as the practice could be considered subletting–and thus implicitly breaches the terms of your lease. The landlord won’t necessarily push back against this business model, but they have to be aware of it. Willerton suggests asking: “Is subleasing permissible and is that something you allow for?”
Though it can be overwhelming to begin the lease renewal process, it’s important to take it step-by-step, always considering the bigger picture and knowing your worth throughout. “Negotiating a commercial lease can feel foreign,” says Willerton, “which is why it’s natural to make mistakes.” However, he explains, “This can really affect the value of your business over time.” If you go into your renewal confident and informed, you can set the terms that work best for you, which means greater success for your business.