By Mathew J. Weiss, Esq., President of Weiss & Associates P.C.
Many business owners negotiate hard on the monthly rental amount (or cost per foot) and little else. This strategy leaves both money and other goodies “on the table” and needless to say is not recommended. When preparing for your negotiations, you must consider the entire package. What that means is that there is much more to consider than just price. This article addresses how to negotiate the best package for a commercial lease.
The first concept you need to understand is the meaning of “Additional Rent”. This term refers to monies you owe the landlord above and beyond the basic rent. Additional rent can take many forms, including your pro rata share of electricity, water, tax increases and porter charges. You, of course, want to pay for as few of these items as possible. If possible, you should ask the landlord to put in (at its expense) your own meter or sub-meter so you pay only for your actual usage (as opposed to some artificial percentage).
Your first lease year (“Base Year”) should be free of any Additional Rent for real estate taxes. After the first year, then most leases state that you are responsible for your pro rata share of any increases above the Base Year. Because your lease likely will commence sometime in the middle of the tax year, you should make sure that you get the first full year without any Additional Rent for real estate taxes. Further, on a renewal, you must make sure the Base Year is re-set so that you get the first full year of the renewal without any liability for real estate taxes.
Just as important are rental concessions. Typically, new tenants are able to get one to six months of free rent. The rationale behind this concession is to offset the tenant’s moving costs and build-out expenses. Alternatively, some tenants are able get the landlord to do the build-out to the tenant’s specifications. Needless to say, this is very important to negotiate. If you can find out what other tenants in the building have gotten, you will have a great head start in the negotiations.
Another critical element of the lease is the term. How long a lease do you need? Do you need renewal rights? You have much more leverage to negotiate a better deal now on these points, then when the lease is about to expire. Of course, landlords often will demand that the rent escalate during the life of the lease which could weight against committing to a long term.
Just as important as the term is getting a right to buy your way out of the lease. Typically, after the first year, landlords will grant you the right to cancel if you give them notice and pay a penalty. Six months advance notice is a reasonable time period.
A related point is whether a personal guaranty will be required. This issue is particularly important if you are unable to obtain a right to cancel. Most tenants do not personally guarantee their company’s leases and, barring unusual circumstances, you should not either. If you landlord insists, offer instead to execute a “good guy” agreement. The “good guy” agreement affords the landlord additional comfort that the tenant will vacate if it is unable pay its rental obligations. In essence, it states that you will personally guarantee the rent and additional rent obligations but only until such time as you surrender possession and deliver the keys. Of course, as with any legal document, you should consult with your attorney prior to signing the lease or good guy agreement as they can be drafted in an overly onerous or unfair manner.
The HVAC systems is another critical negotiating point. Try and get the landlord to be responsible for maintaining, repairing and replacing it. Landlords typically can get better rates for maintenance agreements, especially if they own multiple buildings. At the very least, the landlord should be responsible for replacing the equipment if it is uneconomical to repair it.
The security deposit is yet another item which can be negotiated. Negotiate how much you have to give as well as its return (in whole or in part) after a year.
Finally, do not ignore issues such as signage, parking spots, garbage removal, 24/7 access and rights to sublet a portion of the premises. These items are generally of little value to the landlord, however, and therefore should be saved until the end when you have worked out the main terms and the landlord sees that the deal is near completion (aka the “nibble’).
If you do not forget the basic negotiating tactics – such as not giving a point without getting something else in return – you should be able to get yourself a great lease package.
Weiss & Associates, PC is a full service law firm located at 419 Park Avenue So, Second Floor, New York 10016 and handles corporate law, commercial litigation and real estate transactions. Mr. Weiss also runs 888 RED LIGHT a law firm which defends motorists from traffic tickets. Contact Mr. Weiss at 212-683-7070 or the Traffic Department at 888-RED LIGHT or at its web site at www.nytrafficticket.com